ECONOMICS: In economic terms, the 2008 Budget is quite expansionary and will add to demand in the economy over the next year.
Its expansionary thrust stems from three sources. Firstly, the rate of growth in current public spending remains high. Gross day-to-day spending by Government is set to increase by 8.2 per cent in 2008, well ahead of the forecasted 3 per cent increase in consumer price inflation next year.
Secondly, despite the continued muscular growth in current public spending, the Tánaiste and Minister for Finance, Brian Cowen, taxed with a light touch yesterday. Tax receipts are forecast to increase by just 3.3 per cent next year.
The lightness of the tax load imposed in the Budget can be seen from the fact that, with no tax changes at all, receipts would have increased by 3.1 per cent next year.
Thirdly, public capital spending has been ramped up to almost €8.6 billion, a 10.5 per cent increase on the scale of Government capital spending in 2007.
Given the recent weakening in the pace of economic activity, the fiscal stimulus applied yesterday is justified on counter-cyclical grounds. However, even with the fiscal handbrake off, the economy will still exhibit anaemic growth during 2008.
The Budget has revised downwards the official forecast of real growth in Gross Domestic Product (GDP) from 3.25 per cent to 3 per cent. The projected growth in Gross National Product (GNP) has been cut from 3 per cent to 2.8 per cent.
The weakness continues to stem from the economy's fixed investment sector, and particularly its housing segment. In October, the Department of Finance's Pre-Budget Outlook reckoned that there would be zero growth in the volume of gross fixed investment during 2008.
This has now been revised downwards and a fall of 1.6 per cent in gross fixed investment next year is now projected. The department's projection for fixed investment in 2008 is based on forecast housing completions of around 55,000.
While not scaling the peaks seen this year, real consumer spending is forecast to remain relatively buoyant over the next year, with the volume of consumer purchases expected to rise by 3.8 per cent in 2008.
The department's forecast for consumer spending next year is underpinned by a projected increase in employment of some 25,000 or 1.1 per cent.
Real consumer spending growth next year should also benefit from a decline in the consumer price inflation rate from 4.9 per cent this year to a projected 3 per cent in 2008.
Mindful of the forthcoming negotiations on a new national pay deal, the Tánaiste was careful to avoid imposing any large increases in indirect taxes that would have pushed up prices in the year ahead.
Yesterday's Budget fell short of indexing tax credits and tax bands to average increases in earnings over the past year. Tax credits were raised by 4 per cent, while the standard rate tax band was broadened by 4.1 per cent.
The growth in average earnings during the current year is forecast at between 5 per cent and 5.5 per cent. However, the gap between the rate of earnings growth in 2007 and the increases in tax credits is insufficient to cut into real consumer spending next year.
Reflecting the continuing high level of growth in current public spending, the volume of Government consumption is now officially forecast to rise by 3.6 per cent in 2007.
Taking trends in consumer spending, Government consumption and fixed investment together, the volume of domestic demand is now estimated to increase by some 2.2 per cent during 2008.
The fiscal stimulus earmarked for the economy next year is not, however, without cost.
The General Government Balance is expected to decline into deficit to the tune of €1.8 billion in 2008, equivalent to 0.9 per cent of Gross Domestic Product.
While remaining comfortably within the Stability and Growth Pact deficit limits, the €1.8 billion deficit predicted for 2008 stands in stark contrast to the surplus of almost €4 billion recorded in 2006.