The document produced by the Office of the Minister for Finance dated June, 2002, is marked "Secret" and entitled "Memorandum for the Government Economic and Budgetary Strategy 2003-2005".It opens with a two-page summary, as follows:
Decision Sought
1. The full text of the decisions which the Minister for Finance asks the Government to take is set out in paragraph 1 of the memorandum. In essence, the Minister proposes that:
Budget 2003 be prepared on the basis of a General Government deficit not exceeding one-quarter per cent of GDP in 2003, followed by a balanced position in 2004 and 2005;
The 2003 Estimates and Budget be prepared on the basis of a post-Budget target of €32,650 million for gross current voted expenditure (a 7.9 per cent increase on 2002 allocations, followed by increases of 6.1 per cent and 5.9 per cent in 2004 and 2005) and a post-Budget target of €6,150 million for gross voted capital expenditure (a 7.2 per cent increase on 2002 allocations, followed by increases of 7.3 per cent and 6.8 per cent in 2004 and 2005);
Ministers should prepare their pre-budget Estimates proposals for 2003, 2004 and 2005 on the basis of an overall reduction of €900 million in the 2003 cost of the Existing Level of Service (as set out in paragraph 26 and Annex 2 of this Memorandum);
No provision will be made in these pre-budget Estimates for any policy initiatives, on the basis that all further policy adjustments to expenditure will be considered in the context of the 2003 Budget- Day envelope; and
The Government confirms the date of the next Budget as December 4th, 2002.
Economic Outlook
2. The view of economic prospects which informs this strategy is positive - with average GDP growth over 2003-2005 projected at more than 5 per cent. This is achievable provided there are no major economic shocks and that the international economic pickup and Ireland's competitiveness are sustained. There are substantial risks to this prospect. A sustained pick-up internationally is not yet assured. Strong domestic wage pressures, if continued post-PPF, threaten a significant loss of competitiveness against our trading partners in general. If combined with significant strengthening of the euro against the US dollar and sterling, which is becoming more likely, major competitiveness losses viz-a-viz the UK and US would ensue, both adding to pressure on public spending as well as reducing the potential growth rate in revenue from economic growth.
Budgetary Outlook
3. Despite the positive growth assumption, the budget outlook is for major and continuing general Government deficits unless the rate of growth of public spending in 2003 is reduced well into single digits. Even then, the strategy in the memorandum allows for very limited tax packages only - with the costs of personal tax reliefs being constrained to what can be funded from offsetting excise increases.
The excise increases proposed involve a doubling of the pace of increases in the 1998-2002 period when, on average, excises rose by half the expected rate of inflation. The overall tax packages proposed will raise the ratio of tax revenue to GNP each year by close to one-third of GNP.
Estimates Requirements
4. The post-budget spending parameters set out in the decision sought involve an increase in voted spending virtually in line with anticipated GNP growth. Nonetheless, they require a difficult-to-secure reduction of €900 million in the cost of running the existing level of public services to leave room for a Budget Day envelope of €1.9 billion (over and above the indexation of Social Welfare payments) to meet spending priorities in health, social welfare and infrastructure, as well as accommodating post-PPF pay increases and benchmarking costs. Securing this €900 million reduction will require policy changes to be made. While the amount of the latter is unclear at this point, the total demands under these headings could be substantially above the total available. Any excess cost over €1.9 billion would have to be funded through significant increases in taxation and public sector charges which, apart from their political difficulty, would have unavoidable adverse effects on inflation, wage developments and on the economic prospect underpinning the budgetary parameters recommended - and would involve a still-higher increase in the tax/GNP ratio.