The half-year Exchequer returns signal to the Government that difficult decisions will have to be made in framing the 2002 Budget. The official forecast for the Budget surplus of revenue over spending this year has been cut by £500 million to just over £2 billion, because consumer spending has not grown as rapidly as expected in the first half of the year. If this trend continues, then the Government will have less room for manoeuvre than it might have expected in framing its final Budget .
The Department of Finance had expected overall tax revenue to rise by 12.5 per cent this year. The likely increase now is somewhere around 10 per cent. The main reason for the shortfall is slower growth in consumer spending, which is partly attributable to the foot-and-mouth crisis. The international economic slowdown and rising redundancy levels in some industries in the Republic may also be leading consumers to be cautious.
All the signs are that 2000 saw the peak of the economic boom. Figures published by the Central Statistics Office yesterday show that the economy grew at an extraordinary rate of 10.4 per cent last year, as measured by the rise in Gross National Product. Such a growth rate is not sustainable, particularly as the economy is now close to full employment and the Dublin region is subject to heavy congestion. Another straw in the wind is a forecast from IDA Ireland that employment in the firms it supports will rise by 12,000 this year, compared to 24,000 last year.
Growth this year will probably be closer to 6 per cent and may ease back further in 2002. This has clear implications for the Budgetary arithmetic. The Government has benefited from very flush coffers in recent years, fuelled by the boom. It has been able to afford rapid increases in Exchequer spending, while also announcing generous tax reductions. In planning for 2002, the arithmetic may force the Government to choose its priorities more carefully, if it is to maintain a healthy outlook for the public finances.
The extent of the economic slowdown should not be exaggerated. What has happened is that the Republic has experienced an exceptional period of growth, which has led to cash pouring in to the Exchequer. Unless international conditions weaken considerably, the economy may just be adjusting downwards to a more normal growth rate.
This is likely to force the Government into a more careful assessment of its Budgetary priorities. Does it want to put the emphasis on increasing spending or cutting taxation? How can it ensure value for money is achieved? Where does it believe tax reductions should be focused?
The Government should face up to these issues, rather than hoping enough money is left in the kitty for one more give-away package before the election. The surplus should still allow the Minister, Mr McCreevy, to deliver an attractive Budget. He must also plan to leave the next Government with a healthy outlook for the public finances.