Government is under pressure to keep a lid on spending and readjust to less bountiful times, writes Siobhán Creaton, Finance Correpondent

The Department of Finance has sent a clear message to the Irish public that, regardless of election promises, the Government is now operating within a tight budget and should only be spending money on priority areas.

It is a natural response as economic growth rates slow to what it suggests will be more than 3 per cent compared with 10.4 per cent just two years ago.

Already some economists suggest the Department is being too cautious and that the economy has the capacity to grow by 5 per cent or more this year because of the strong growth in exports in the early months of 2002.

Whichever forecasts prove accurate, the Government will still be under pressure to keep a lid on spending and re-adjust to less-bountiful times.

There are few who will criticise the Department for wanting investment in infrastructure put at the heart of Government spending. The National Development Plan and other initiatives go to the heart of securing longer term economic growth.

On balance, the Department believes this will be money well spent and is a better option than providing more public services or cutting tax rates at this juncture.

It has also signalled that inflation will continue to rise unless fresh Government measures are introduced to contain it.

The Department blames higher wage costs as one factor fuelling higher prices and costs but also points to the lack of competition in certain sectors of the Irish economy as a chief cause of spiralling inflation.

The sub-text to this is that the Government will have to consider ways to stimulate competition if it is to suppress inflationary pressures in the longer term.

The monthly Consumer Price Index has consistently highlighted areas where price rises are a continuing problem, with the services sector emerging as the greatest offender.

It will always be difficult to foster greater competition in certain sectors of the Irish economy given its relatively small size but there are sectors such as insurance where the benefits of greater choice would be acutely felt. The Government could also look within sectors under its control, such as transport, and accelerate initiatives to foster more competition.

The Department is also signalling a very modest Exchequer surplus by year-end, despite growing expectations that the public finances were moving into the red.

As tax revenues remain sluggish, the Department believes that by year-end there will be a shortfall of €500 million, although this may be higher depending on the cost of meeting payments due under the Government benchmarking proposals.

Most economists believe that, by the end of 2002, the Exchequer will be reporting a deficit ranging from between €500 million and €1 billion but much will depend on the Government's success in controlling public spending.

The review shows the Department taking a less-optimistic view of growth in public consumption, reducing its forecast from 5.7 per cent to 4.3 per cent.

This could be partly due to reduced spending as consumers become more cautious given the economic uncertainties.

Another factor is also likely to be the Government-backed Special Savings Investment Scheme, which encourages people to save part of their disposable income.