Economic Analysis:The year 2002 excepted, budget surpluses have been run in every year since 1997. Even the 2002 deficit was a modest affair, some €547 million or just 0.5 per cent of Gross Domestic Product (GDP).
But if Enda Kenny's remarks at yesterday's Fine Gael manifesto launch are anything to go by, budget deficits might be about to make a comeback. In its plan Fine Gael assumes nominal economic growth (growth in the volume of output plus growth in prices) and tax revenue growth will average, respectively, 7 and 7.7 per cent per annum between 2008 and 2012.
This gives enough room for €4.9 billion on election spending commitments, as well as a €3.4 billion package of tax cuts.
It was put to Enda Kenny and Richard Bruton yesterday that the ESRI and Central Bank were forecasting nominal growth to be about a percentage point lower than they expect in 2008 and that, if this trend continued, a €5billion hole could emerge in their election finances. Which promises would they cut if this happened? The Irish Times asked.
In responding, Mr Kenny began by saying that, under existing assumptions, Fine Gael expects to avoid running deficits (this is only just true; in 2012 Fine Gael expect an exactly balanced budget). He then said Fine Gael would manage the budget "within the parameters of the Stability and Growth Pact". The pact allows governments to run deficits of up to 3 per cent of GDP. When decoded, Kenny's remarks mean that, if budgetary solids hit the fan, Fine Gael will contemplate borrowing rather than breaking its promises.
The present Government has run an average surplus of 1.6 per cent of GDP. In the two years in which it had full control over the budget, 1995 and 1996, the rainbow ran an average deficit of 1 per cent. Had it stayed in power during these past 10 years and maintained this performance, the rainbow's budgetary batting average would have resulted in a very different debt situation than we now have: the size of the national debt as a share of GDP would be around double what it is today.
Not that the present Government deserves any credit for what actually happened: Its record on economic growth is not that much better than the rainbow's. But whereas growth in the 1990s was dominated by the multinational sector, more recent growth came from the tax rich domestic side of the economy, especially the construction and property sectors. In the five full years from the start of 1992 to the end of 1996, the nominal economy grew by 69 per cent and tax revenues grew by 60 per cent.
In this decade the domestic economy took over as the engine of growth, and in more recent years a credit-fuelled property boom has made growth more "tax rich": Where the nominal economy grew by 49 per cent between the start of 2002 and end of 2006, tax revenues grew faster, by 63 per cent.
Which brings us to the crux of the problem with Fine Gael - and Fianna Fáil and Labour's - assumptions. About one-fifth of the economy is now dependent on the property and construction sectors, and most economists accept this must decline. Now all parties have assumed that taxes will grow by 1.1 times nominal GDP growth between 2008 and 2012. But, as mentioned above, revenues grew by just 0.9 times nominal growth between 1992 and 1996, inclusive. In the subsequent period the ratio was even lower, 0.7 times.
When calculating the €5billion hole that could arise if average nominal growth was 1 percentage point lower over the period of the next government, a ratio of 1 was assumed - lower than what Fine Gael assumes, but only modestly so. That outcome would cause FG to run a budget deficit in excess of 2 per cent of GDP. If the relationship between tax revenues and economic growth returns to what it was in the 1990s, the government that brokered the Stability Pact could end up having to explain why it breached it.