The outlook facing the Minister for Finance, Mr Cowen, as he frames his first Budget has improved significantly with borrowing now forecast to come in €1.6 billion below expectations this year, writes Cliff Taylor, Economics Editor.
Tax revenues are buoyant, according to new figures, benefiting from rising growth and the booming property market.
The third quarter Exchequer figures, published yesterday, show that borrowing in the first nine months was just €418 million, a fraction of the €2.8 billion recorded for the same period last year. On this basis, the Department is now predicting that borrowing for the full year will be €1.2 billion, compared to the Budget forecast of €2.8 billion. It is the second downward revision of the borrowing estimate made by the Department.
Private sector economic forecasters believe that Mr Cowen now has room for a generous Budget tax package - including indexing tax bands and credits - and targeted increases in spending in key areas. A number of economists last night estimated that he had €1 billion or more to allocate on Budget day.
Tax revenues are buoyant, running 12.4 per cent up on last year, well ahead of the 4.9 per cent Budget target. However, the Department of Finance cautions that almost half of the €1.6 billion overshoot in revenues is due to money from the Revenue Commissioners' scheme to collect offshore funds and from what it believes was a once-off jump in capital gains tax.
Excise duties are up despite a €50 million shortfall caused by the sharp drop in smoking. Revenue tobacco clearances are down 14 per cent on last year, indicating that the smoking ban is having an impact and is accelerating an existing downward trend.
While tax revenue is ahead of expectations, the figures show that Government spending is €1 billion lower than target in the first nine months. Current spending on services, now running €330 million below expectations, will come in roughly on target for the full year, the Department expects. However capital investment spending, which was €2.6 billion in the first nine months, was running €742 million below expectations and is well down on last year's level. Much of this ground will be made up, the Department says, but some €55 million may be carried forward to 2005 as spending on roads comes in below target.
These trends should provide a strong backdrop to Budget 2005, though Department of Finance officials warn that higher oil prices remain a threat and point to recent IMF predictions of a slowdown in world growth. "To talk of the Celtic Tiger is not really appropriate at this time," one official commented. In a brief comment published with the figures, Mr Cowen said that the third quarter picture "is a result of prudent fiscal management which I intend to maintain".
However, provided the growth outlook does not deteriorate, Mr Cowen now appears to be in a strong position. The Department estimates that, using the EU borrowing measure which excludes the State's contribution to the National Pension Reserve Fund, the Exchequer will record a small surplus this year.
Private sector analysts believe that the out-turn may be even better than the new Department predictions. A number of analysts last night forecast that the Minister would have €1 billion or more - some estimates run as high as €1.5 billion - to allocate in Budget tax and spending measures, above and beyond what is needed to maintain current services.
Last night Ms Joan Burton, the Labour finance spokeswoman, said Mr Cowen must "deliver for families" in the Budget. He must tackle the tax wedge for those on average wages, she said, "as well as investing in the future of the Irish economy". The underspending on capital projects was "a shocking failure of financial management", she said. For Fine Gael, Mr Richard Bruton said that taxation per household this year would be €2,800 higher than in 2003.