The political difficulties in framing the December Budget increased for the Government yesterday as it admitted for the first time that it will have to borrow €750 million just to fund this year's spending commitments. Una McCaffrey and Mark Brennock report
It appears very likely the Government will have to increase taxes or cut spending on existing services, or do both, after the Minister for Finance, Mr McCreevy, said he expected the public finances to fall into deficit by €750 million this year.
This compares to his Budget Day forecast of a €170 million surplus, and runs contrary to his consistent statements on the matter throughout the year.
The Minister for Justice, Mr McDowell, last night left open the prospect of tax rises in the December budget. While there would be no changes in taxation rates between now and December, the Budget for next year was "a different matter", he told RTÉ News.
Fine Gael and Labour said last night the latest Exchequer figures show the extent of the "misrepresentation" of the state of the public finances during the general election campaign and in the last Budget.
The figures show that public spending is running at a persistently high level despite the recent €300 million worth of cuts and savings implemented across all Government departments. At the end of last month, current spending was 20.3 per cent higher than at the same stage in 2001.
Department of Finance officials insisted yesterday they could still achieve the target set in the last Budget of an increase in public spending of 14.3 per cent for the year as a whole. However, to achieve this target, spending growth for the last three months of the year would have to fall to just 3 per cent.
They declined to elaborate on how this could occur. However, they said "timing factors" can heavily influence spending numbers, adding to speculation that some capital spending payments may be deferred into next year in order to balance the 2002 books.
Crucially, the Government's deficit prediction does not count in initial payments of €290 million under the benchmarking process, which had been expected to fall due at the end of this year. Mr McCreevy's officials said that talks with public service unions were "unlikely" to be completed on time for these payments to be made this year.
The radical U-turn in the predicted outturn for this year has been prompted by the revelation that tax revenues for the year are likely to come in €1.3 billion below expectations. The Minister said the shortfall could be blamed on "disappointing" income tax and corporation tax returns.
At the end of September, the overall tax take, at almost €21 billion, was up 2.6 per cent on the same point last year. Within this, revenue from income tax had declined by 10.7 per cent, compared to a Budget target for the year of a 1.1 per cent increase. Corporation tax receipts, meanwhile, have grown by 8.7 per cent, far away from a Budget target of 29.5 per cent expansion.
Department of Finance officials said that the mismatch in projections was probably due to slower economic growth and the "changed economic habits" of taxpayers. They also said insufficient information on tax revenue had previously been available.
Mr McCreevy issued a two-line statement in which he acknowledged that tax revenue was "significantly below original expectations". He noted that "an Exchequer deficit is in prospect", despite "positive developments on other elements of the Exchequer account".
Balancing against this are factors such as the special savings incentive accounts, which are expected to drain €425 million from tax revenue this year.