As Fianna Fáil and the PDs prepare to announce a new Programme forGovernment, the management of expectations is critical for the incoming administration, writes Colin Hunt
The Fianna Fáil and Progressive Democrats are about to publish a Programme for Government for the next five years. After an exhausting electioneering effort, the incoming Cabinet can expect a period of respite in which to restore energies and immerse themselves in their Departmental briefs.
While such an expectation is understandable, it should be regarded as entirely unrealistic given the array of pressing issues which await the attention of the new government.
There have been many attempts over the course of the past 12 months to suggest that the public finances are in a calamitous state. While the bloated surpluses of the boom years have now disappeared, balanced budgetary out-turns are an achievable prospect over the lifetime of the new administration.
Concerns have been expressed about the lack of buoyancy on the tax revenue side of the Government's accounts. However, since the start of the year, there has been a discernible improvement in the underlying revenue trend with only income taxes remaining well inside under-performance territory.
Given the timing distortions arising from the change in the fiscal year from the antiquated April-to-April arrangement to a more sensible calendar basis, we expect the contribution of income taxes to improve as we move towards the autumn. With a domestic economic rebound now well underway, revenues should be broadly in line with Government forecasts when the next minister for finance delivers Budget 2003.
An emphasis on disappointing revenue growth serves merely to divert attention from the real budgetary challenge that will confront the new administration. Spending increases in excess of 20 per cent, affordable when the economy was enjoying a supernormal growth experience, are clearly unsustainable in a calmer economic environment. While the economy's prospects are bright with growth expected to settle within a 4 per cent to 5 per cent range over the medium term, such a pace of expansion will not simultaneously accommodate high spending growth, fiscal prudence and low taxation.
If the structural efficiency of the Irish economy, characterised by an incentivising tax regime, small government and exemplary budgetary out-turns, is to be protected and enhanced, current spending growth will have to slow from the clip of 20 per cent to a restrained 6 per cent by 2003.
A moderation in spending growth of that magnitude will be sufficient to eliminate the need for tax increases, to deliver broad budgetary balance over the next five years and to avoid another rap on the knuckles from the European Commission. While 6 per cent growth in current expenditure may be regarded as parsimonious given recent experience, it should be remembered that in other mature economies annual spending growth of that magnitude would be regarded as positively bounteous. We do not need to cut spending, merely to moderate its growth to a more sensible and sustainable pace.
At a general level, a significant reduction in spending growth will only be achieved if we, the public, adapt our expectations on both the wage and fiscal fronts to the country's changed growth environment.
The new government's willingness and ability to return spending growth to a sustainable level will be tested very early in its working life with the Public Sector Benchmarking report set to be released within a month of taking office.
If benchmarking is to work, its recommendations should focus on areas in the public sector which are experiencing difficulties in the recruitment and retention of staff.
An outcome driven by such an approach would be equitable from the viewpoint of public sector workers, taxpayers and those of us who are concerned about the future health of the national finances. Fairness to all and affordability should guide the Government's actions over the coming weeks.
Colin Hunt is head of research at Goodbody Stockbrokers