There are signs of a serious row developing over the 2002 Budget, due to be presented by the Minister for Finance, Mr McCreevy, in December. The European Commission has already warned the Minister that his Budget policy is too lax, a view echoed last week by the European Central Bank president, Mr Wim Duisenberg. Yesterday, the Central Bank of Ireland weighed in, arguing that the goal of Budget policy should be to help the economy slow to a sustainable growth rate of around 5 per cent per annum. With an election due next year, Mr McCreevy shows no signs of accepting this advice.
The Central Bank believes that after seven years of strong economic performance, signs of a slowdown are now evident in the Irish economy. Gross National Product has expanded by a little over 8 per cent on average over the seven-year period. This year growth may slow to around 6.5 per cent, the bank's forecasters believe, due to a weaker US economy and the aftermath of the foot-and-mouth crisis.
While this is a significant slowdown, it would still leave growth above the sustainable medium-term rate of around 5 per cent, the bank points out. In other words, it believes that for as long as growth remains above 5 per cent, inflationary pressures will remain and the associated problems of congestion and labour shortage will intensify. As Irish policy-makers have no control over interest rates, the only lever they can use to help slow the economy is budgetary policy. The message from the Central Bank is that there must be no "give-away" Budget.
There seems little chance that Mr McCreevy will accept this guidance. Unless the Government falls apart in the meantime, the 2002 Budget is likely to be a typical pre-election package, with further significant tax reductions and higher spending on key public services such as health. Whatever the Central Bank or the EU Commission may feel, the focus of the Government strategy will be firmly on winning popularity with the electorate.
This strategy could have a cost however. The Bank warns that if the Government does not try to slow the economy, then inflationary pressures will remain - particularly in the labour market. This will lead to a loss of competitiveness for exporters and the risk is that this adjustment will not be smooth and that substantial job losses could result. Already, there are signs that redundancies are picking up and that many more traditional industries are struggling. Further wage increases, above those of our competitors, could have a more widespread impact on exporters.
It is too early to adjudicate firmly on the appropriate stance for the 2002 Budget. A sharp downturn in the US - or even further weakness in the euro zone - could change the picture. At this stage, however, economic growth remains quite strong and, with the economy running at full capacity, the Government should plan a prudent Budget, aiming not to add too much further to demand, while tackling key problems in delivering public services. Its recent record gives little confidence that it will follow this course.