John McManus assesses Government thinking revealed in two confidential Department of Finance memorandums
Thanks to a clerical error in the Department of Foreign Affairs we now have an insight into both the true state of the national finances and the Minister for Finance's plans to fix them.
Leaving aside the issue of the dissembling by the Minister and his colleagues on the election campaign, the documents released over the weekend probably do the Government more good than harm.
If nothing else, they reveal that the information used by the Government to make its decision is the same as that made publicly available, after an appropriate delay, via the Exchequer returns. It is also reassuring to see that despite his bravado, the Minister is very much alive to the very real dangers facing the economy.
Two Department of Finance memorandums surfaced at the weekend, both released by mistake by the Department of Foreign Affairs to the Sunday Tribune in response to a request under the Freedom of Information Act. The most important one dealt with economic and budgetary strategy from 2003 to 2005. The second one dealt with cutbacks being sought this year.
The question that arises from the memorandums is whether or not the Department might be tending too much towards optimism over what it thinks needs to be done and also what it thinks can be achieved.
The memo relating to this year deals with some €311 million in cutbacks. As a letter accompanying it reveals, these measures were adopted by Cabinet on June 10th. They are intended to offset a number of overspends in other areas, including a €1.5 million bill for pensions to former members of the Oireachtas. The overall objective is to ensure that this year's budget target of a surplus of €342 million is achieved.
The memo dealing with 2003 to 2005 was, in the words of one insider, a "cold shower memo", and was intended to set the backdrop for the annual round of negotiations between Finance and other Departments on spending. It was prepared in June and according to reliable sources has not been updated. The underlying assumption of 5 per cent economic growth over the period 2003 to 2005 now looks optimistic. As the memo points out "the risks to this projection are on the downside". Many of these risks have materialised; the US economy could be on its way into another recession and European growth is slowing to a standstill.
The memo warns that lower growth will mean even lower tax receipts and "this in turn would require a review of the proposed budgetary aggregates". Such a review now seems unavoidable.
It is hard to see how spending next year can be pared back further. Just hitting the targets of a 7.9 per cent increase in current spending and a 7.2 per cent increase in capital spending will require a €900 million cut in the cost of running the existing public services. The €1.9 billion in extra spending to be announced on budget day will all go to "meet spending priorities in health, social welfare and infrastructure, as well as accommodating post-PPF pay increases and benchmarking costs".
This leaves Mr McCreevy two options - either he can increase taxes or else borrow. Given that the plan outlined in the memo already sees taxes borne by earners going up - as a result of pegging increases in tax bands and allowances to inflation - the latter option is the most likely.
The Government is already contemplating running an Exchequer deficit of €2.3 billion next year. Allowing this increase by a few hundred million will be the less painful option. Such borrowing can be justified if the money can be seen to go into much-needed infrastructure at a time of faltering economic growth.