The Minister for Finance, Mr McCreevy, contends that Budget 2001 will combat inflation. His package contained a number of measures designed to slow the rise of the consumer price index (CPI) and temper inflationary expectations.
But will it be enough to address inflationary pressures? While he has taken specific actions to bring down the consumer price index in the short term, the huge sums of money being poured into the economy in both the Budget and the Government spending plans for next year will in themselves be inflationary by adding to general demand in the economy.
The anti-inflation package consists of cuts in value added tax (VAT) and excise duty to bring down the consumer price index and ease transport costs. The one point cut in the standard VAT rate to 20 per cent will cut 0.4 per cent off the CPI next year. Cuts in excise duty on diesel and non-leaded petrol will cut an additional 0.1 per cent. Of course the problem is that in the longer term, by making goods cheaper, he could be encouraging greater consumption which in itself could be inflationary.
The Minister is also hoping that measures to encourage the consumer to save rather than spend will also help, by lowering spending on consumption. However, these measures were less far-reaching than many had been hoping for and are unlikely to affect consumer behaviour significantly.
The third measure which Mr McCreevy pointed to as anti-inflationary is the reductions in direct tax, which will increase participation in the workforce.
However, labour supply was not very responsive to last year's tax cuts - the reductions did not appear to lead to a big increase in the number of people seeking work. In addition, growing services inflation across the State is the direct result of the huge employment increases we have seen over recent years, as more and more people have significant disposable incomes to spend.
Overall, the Department of Finance is now estimating that inflation in 2001 will average 4.5 per cent, down from the latest figure of 6.8 per cent. The 4.5 per cent forecast is also the figure which the renegotiation of the Partnership for Prosperity and Fairness (PPF) was based. But that is also predicated on unchanged interest rates, exchange rates and commodity prices and all may work in our favour next year. So the official forecasts of inflation for next year may be on the high side.
The markets are now beginning to build in expectations of interest rate cuts next year and oil prices are already falling back. The euro also looks as if it may have hit the bottom but of course it is hard to be sure, given the currency's turbulent history.
As a result, if international circumstances are favourable inflation could well come in below 4 per cent next year, according to Dr Dan McLaughlin, chief economist at ABN Amro.
Overall the Budget is cutting taxes by some £910 million (€1 billion) and increasing spending by some £602 million over just nine months or £813 million over a full year. However, in terms of Exchequer arithmetic, that would be offset by a saving the Minister has found since last Saturday's pre-budget forecasts of some £400 million on debt redemption costs next year.
The question is how much the additional Government spending and tax reductions would add to demand and thus inflationary pressures. The income gains are significant. After all single people on £20,000 will gain some £1,380 a year. A married couple on two incomes and £40,000 will gain £3,260. Much of that money is likely to be spent on services in the economy and it could also add to demand in the housing market.
The worry is that, as the Economic and Social Research Institute (ESRI) pointed out, this comes just as house prices appear to be flattening out. Higher borrowing and rising house prices will add to the vulnerability of the economy. The job losses announced at the Motorola plant in Swords yesterday show we do remain vulnerable to international events.
Some economists argue that the figures are not as inflationary as they look. After all, the total amount of tax being taken out of the economy continues to rise. Over a full year Mr McCreevy is assuming that he would get some £790 million back through buoyancy from the £1.2 billion in tax cuts. As a result the current Budget surplus would increase to £6.1 billion next year, from an expected £5.5 billion outturn this year.
One cause for concern for some multinationals - and for inward investment - would be the abolition of the employers' PRSI ceiling. Those at the higher end of the value-added scale are likely to employ significant numbers of higher paid workers. Many are on the special 10 per cent manufacturing rate (which is to rise in a couple of years to 12.5 per cent) already and thus do not benefit from the 4 per cent cut in corporation tax which Mr McCreevy said the increase is designed to offset.
Looking at the overall outlook, the Government is crossing its fingers that oil prices will continue to ease and that the euro will edge upwards, further taking the pressure off inflation. And they would hope that the overall international outlook remains benign. If this happens, then the economy should be set for another year of reasonably robust growth.