ECONOMICS: The growth in the tax base and the need to keep borrowing within limits set down by Republic's euro partners will ultimately constrain spending

The debate, if that is what it was, on the main parties' fiscal projections has become less clamorous of late, but one might still be forgiven for believing that there was substantial differences between the competing economic programmes. In reality, the surprise is the similarities, and the conservative nature of the spending projections.

All agree, for example, on the need to cover current spending from current revenue and none are putting forward higher tax rates on income or profits, which makes one wonder at the howls of protest that met the announcement of tax cuts in the past. Parties do differ on the scale of borrowing for capital purposes, and on the total Exchequer spend over the five-year period, but most of the latter can be accounted for by the range of growth projections underlying the various fiscal platforms.

Tax revenue will generally move in line with GDP, in the absence of sharp moves in tax rates, and all the main parties are anticipating much slower growth relative to the recent past. From 1995 to 2000, for example, annual real GDP growth averaged just under 10 per cent, but of more relevance to the tax base is the growth in nominal GDP (i.e. real growth plus the rise in prices), which averaged some 14.5 per cent.

What is a reasonable projection from here to 2007?

I would argue that the economy's real growth potential (in terms of GDP) is about 6.5 per cent, made up of 4 per cent productivity growth and a 2.5 per cent rise in employment. Inflation is likely to exceed the EU average (say 2 per cent) by between 1 per cent and 1.5 per cent per annum, so nominal GDP growth could well average 10 per cent or so over the period (6.5 per cent real plus 3.5 per cent inflation).

This may be too optimistic for some, but one cannot accuse the political parties of optimism on the basis of their published projections. Fianna Fáil is the most conservative, with nominal GDP growth averaging just 7.7 per cent per annum, with Fine Gael and the PDs somewhat higher at around 8 per cent.

Labour is the most upbeat, with nominal GDP growth a full percentage point per annum above that of Fianna Fáil. This may not sound much but it matters over five years. GDP under Labour's projection amounts to €188 billion in 2007, against €179.5 billion under Fianna Fáil's forecast. Tax revenue in 2002 is expected to be 24.6 per cent of GDP. If that ratio applied in 2007, tax revenue would amount to €46.2 billion under Labour compared to Fianna Fáil's €44.2 billion, a difference of €2 billion.

Not surprisingly, then, Labour's current spending plans outstrip the other parties, largely because their growth projections are higher, so generating more tax revenue to spend. In fact, current spending grows at a faster pace than GDP under both Labour and Fine Gael, but only marginally.

Gross current expenditure amounts to 27.3 per cent of GDP at the moment and rises by one percentage point over the next five years under the former Rainbow partners. In contrast, spending falls under both Fianna Fáil and the PDs, at least on paper, to 26.9 per cent and 26.2 per cent respectively. To put this in context, gross current spending amounted to 33.6 per cent of GDP in 1996, and 36.5 per cent in 1990.

Similarly, on the capital side, where the large sums projected generally do no more than keep pace with the capital spending share of GDP in 2002 (5.4 per cent). Labour is again the exception, with capital spending rising to 6.2 per cent of GDP, requiring extra resources, via pension fund monies and more capital borrowing than the other parties.

In fact all augment capital resources with off-balance sheet revenue: Labour via the State pension fund, Fianna Fáil through additional borrowing via a new agency, the PDs via privatisation, and Fine Gael via public-private partnerships.

The published fiscal plans beg other questions (are promises made on the hustings costed and included for example?) but the conclusion has to be that the spending plans are far from radical, as all are ultimately constrained by the growth in the tax base and the need to keep borrowing within limits set down by our euro partners.

True, the tax burden does rise somewhat under Labour and Fine Gael, but by 1 per cent of GDP. So, for now at least, the tax cuts delivered in the 1990s look to be set in stone.

• Dr Dan McLaughlin is chief economist with Bank of Ireland