Charlie McCreevy still has economic room for manoeuvre and should be prepared to countenance a small Budget deficit of 1 per cent of GDP for 2003, argues Austin Hughes
Dire warnings from the Department of Finance - like the Rose of Tralee festival and All-Ireland Finals - used be part of a tradition that told us another year was drawing to an end.
No matter what the prevailing economic circumstances were, the mandarins in Merrion Street would issue stern reminders to spending departments on the need to tighten public purse strings. In the past couple of years, overflowing public coffers seemed to have ended this tradition. If the Department of Finance was urging caution during this time, it had as much impact on Government spending as appeals to stay off the Croke Park pitch had on the Armagh faithful on Sunday.
In order to bring an element of crowd control to public spending, it is not entirely surprising that the Department of Finance memo leaked at the weekend suggests that exceptional measures will be needed to restore order to the Irish Budget situation. The main motivation is to bring about a sharp change in expectations rather than to signal a response to an impending economic crisis.
The dramatic impact of the memo underlines a concern that many in this country, including it would seem most of the members of the two Government parties, have not grasped fully what a weaker economic climate must imply for public spending and taxation, not only this year but for the foreseeable future.
While I don't think we are close to a crisis point, early, decisive and sustainable action must be taken to ensure a crisis doesn't become a real possibility within a two or three-year timeframe.
Inside the Department of Finance, senior officials whose memories stretch back to the dark days of the 1980s will have become increasingly uncomfortable as ghosts of budget mismanagement during that awful time might be glimpsed in the shadows of recent events.
Back then, large increases in public spending, inflated by excessive price pressures in the Irish economy, seemed almost impossible to restrain without the risk of substantial cutbacks in public services.
Tax revenue growth repeatedly disappointed as an economic rebound remained elusive, so "creative" measures were introduced to plug gaps in the budget arithmetic. In these circumstances, businesses and households awaited the Minister for Finance's annual speech with trepidation as the trawl for new sources of revenue meant it was impossible to be confident what income growth or the return to enterprise might be in the aftermath of budget changes.
We are some distance from the problems of the awful 1980s. Ireland's economy and its public finances remain healthy thanks to the recent boom, but the trajectory they have been on for the past couple of years will have had alarm bells ringing in the Department of Finance long before now.
This is because it took nearly a decade to restore order to the country's public finances and close on another five years before employment growth began in earnest in this economy.
The intensity of the Department's weekend warnings merely underline the painful lesson that a budget crisis is better avoided than cured.
Those of us who remember how difficult it was to turn around a dreadful budget situation can at least understand the logic behind the memo. Someone whose knowledge of Irish budget matters stretches back only a couple of years might be forgiven for imagining the Minister for Finance's job was simply to control a lever that had two settings: stop and go.
The reality is different. Unlike his counterparts in most other European countries, Charlie McCreevy has room for manoeuvre. Provided he sticks to a path that can be sustained, there is no economic logic in refusing to countenance a small deficit. A General Government Deficit of around 1 per cent of GDP in 2003 could be strongly defended in view of the need to bolster this economy's growth prospects by improving infrastructure. It would also accommodate a rise in day-to-day spending and ensure little change in the tax burden.
In terms of day-to-day spending, where the weekend memo talk of cutbacks was concentrated, it would be reasonable to target a spending increase of just under 10 per cent in 2003.
Talk of much smaller increases is too ambitious. It would be very worrisome if Government departments could really shift from spending increases of around 20 per cent for the past two years to a flat spending profile in 2003.
That would suggest that recent increases were entirely due to a failure to control spending rather than the introduction of new programmes. Sharp cutbacks next year could also weaken a less robust Irish economy.
In any event, history teaches us that a draconian spending profile next year would only result in a build-up of spending pressures that are likely to spill over before the next election.
On an encouraging note, warnings on the need for controlled public spending make it less likely that taxation will bear the brunt of the Budget adjustments now necessary.
It should be remembered that a falling trend in taxes encouraged far stronger growth and a better Budget position in Ireland in the late 1990s than most economists would have envisaged.
If households and businesses in Ireland and companies and bureaucrats abroad get the impression that Irish taxes could be set on a rising trend, the economic damage could be considerable.
However, the Minister has leeway to get taxation policy right only if he can control public spending.
The weekend warnings from the Department of Finance don't signal a crisis but they do suggest that careful choices must be made if a crisis is to be avoided.
• Austin Hughes is chief economist at IIB Bank .He worked in the budget and economic analysis section of the Department of Finance between 1980 and 1984.