ANALYSIS: The six key economic challenges which will face the incoming government are examined by John McManus
The economic boom is over and with it has gone the surging Exchequer revenue which made choices easy for the outgoing administration. Instead, the slowing economy and the widening gap in the public finances mean the incoming government will quickly face a range of problems.
1. Control Government Spending
One of the figures frequently bandied about in the general election campaign was that Government spending had grown by 40 per cent in the last two years. There is broad consensus that spending is growing at an unsustainable rate.
The outgoing Fianna Fáil-Progressive Democrat administration is committed to trimming back spending growth to 14 per cent for this year. Both parties are talking about increases of roughly 8 per cent a year after that.
Should they form the next government they will quickly find that these targets look optimistic based on current trends. The most recent figures show that day-to-day spending by Government departments is already some 21 per cent ahead in the first four months of the year, although this figure needs to be treated with a certain amount of caution as Government spending is not spread evenly over the year, but instead varies from month to month.
The worrying extent to which Government spending has departed from the targets set out in the Budget has two consequences. The minor one is that it undermines the economic plans outlined in the party manifestos, which assumed that the economic targets in 2002 would be met. But these plans are all up for review as part of the negotiations to form the next government.
More importantly, it puts a lot of pressure on the next minister for finance. At the very least there will have to be a change of tone as regards the incoming government's attitude to expenditure and in extremis there might need to be a mini-budget with new lower spending targets set across government's departments.A greater emphasis on value for money will be vital.
However, the new government will have no mandate to cut spending. In reality it will have a mandate to do the opposite, as the entire election campaign was fought on the basis of increased spending on services and infrastructure.
It will take a strong minister to resist the pressure from new cabinet colleagues to start implementing the election spending promises. It would also require a very cynical taoiseach to renege on these spending commitments having just won an election on the back of them.
2. Get Revenues Up
The nascent public spending crisis facing the incoming minister is amplified by a growing shortfall in government revenues. Income tax receipts - one of the main sources of government funds - are well below the levels predicted by the outgoing administration in its Budget. As a consequence, the Government's books are badly out of balance, even before the impact of higher than expected spending and election pledges is taken into account.
There is little the new minister can do to boost revenues from taxation in the short term. Again, radical action would have to be taken, such as raising direct or indirect taxes and once again there is no mandate for such a course of action. The outgoing Government's position was that the shortfall was due to a number of technical factors and that, come the end of the year, the books will balance. Few independent economists share this view, and most calculate that the economy will have to grow infeasibly fast come the year end in order to make up the shortfall that has already manifested itself. A deficit of between €1 billion and €2 billion for the year is predicted.
If the new minister is serious about balancing the books then additional sources of revenue will have to be found. The outgoing administration was already relying on a €700 million fillip from the Central Bank and a €635 million contribution from the Social Insurance Fund to achieve a surplus. There are a number of other revenue rabbits that could be pulled out of the hat this year, but none of them are bankers. They include the early payment of corporation tax; the sale of third-generation mobile phone licences, and the privatisation of other State assets. Even if the new minister can conjure up a balanced budget through reliance on a number of once-off measures, the underlying position going into 2003 will be a significant deficit unless the apparent hole in the revenue base is addressed.
3. Get Inflation Down
The Irish inflation rate remains the highest in Europe. It is an "honour" the Republic has enjoyed on and off for much of the last two years. The ESRI and other commentators have already identified inflation as the single biggest threat to long-term economic prosperity. Rising prices inevitably lead to higher wages and there is a real risk that the Republic is on the verge if an inflationary spiral.
Low wages relative to our competitor countries have been one of the drivers of the economy in recent years and hence spiralling wage costs are a serious, if not the most serious, threat to the economy.
Apart from freezing the cost of key goods and services, there is little the minister can do to control prices. In any case this is a crude approach and ideologically unappealing to a centre-right administration.
The challenge will be to try and suppress demand for goods and services by reducing the amount of money in people's pockets available for discretionary spending. In essence this means keeping wages down, as tax increases are a non-starter. Two issues are of direct relevance here: the benchmarking review of public sector pay and the agreement of a successor to the Programme for Prosperity and Fairness.
4. Managing Public Sector Pay
The issue of public sector pay is arguably the most immediate issue to be tackled by the incoming minister.
If this is handled successfully, many of their other problems will be alleviated.
The public sector pay bill is the single biggest on-going expense incurred by the government, accounting for some 60 per cent of current spending. Keeping it under control is central to any serious attempt to control government spending.
In addition the huge number of people on the Government pay roll means that moderate pay increases here will go a long way to keeping the lid on inflation across the economy. The problem facing the new minister is the pent-up expectation amongst public sector workers who feel they missed out on the fruits of the economic boom.
The boom may be gone, but the expectations are still there.
The outgoing administration side-stepped the problem by setting up a review group that would establish how and if public sector wages should be brought into line with the private sector.
The report of the benchmarking group will be on the minister's desk shortly.
The first 25 per cent of the awards must be paid and will be backdated to December. The true test of the minister will be how and if the payment of the other 75 per cent can be structured to minimise the negative impact on the Exchequer and inflation.
5. New National Wage Agreement
The odds against another national wage agreement seem to be growing daily, although the need for one to help control inflation is growing apace.
The main stumbling block is that the government will no longer be in a position to sweeten a moderate wage deal between employers and workers with tax-breaks.
Taxes are already low - in fact, the jury is out on whether they might be too low to sustain the Exchequer. Finding some new non-pay mechanism through which workers could be rewarded for industrial peace and moderate wage increases is a tall order for any minister.
Employers also have gone cold on the issue, accusing the unions of breaking the current agreement and treating it as little more than a floor for local bargaining.
6. National Development Plan and Value for Money
Finding the money for the NDP will be one of the longer-term jobs for the new minister. There is broad consensus that the new government will have to borrow and that as long as the money is channelled into capital projects this is a reasonable move.
Various ways of borrowing have been mooted but the debate is really about borrowing in the most efficient way and in a way that is palatable to Europe.
The real challenge in this area for the new minister will be to ensure that the money borrowed is really spent on capital investment and not just given away under various NDP schemes.