This week's Exchequer returns for August underline the difficult decisions facing the Government in framing the Budget for 2002.
The Department of Finance is now suggesting that the surplus of exchequer revenue over spending this year will be £750 million less than expected; however many forecasters believe that the shortfall is more likely to reach £1 billion, which would reduce the surplus for 2001 to £1.5 billion.
If the economic downturn continues, it will transform the whole background to the December Budget. Already there is no doubt that the Government has considerably less room for manoeuvre than it anticipated.
The Department of Finance had expected tax revenue to rise by 12.5 per cent this year, compared to 2000. But the latest figures for August show that tax revenue is growing by less than 4 per cent.
There are signs that the economic slowdown is now spreading. Most worrying is the trend in income tax receipts. It is not clear if this points to slowing employment growth or a fall-off in wage increases - or both. Weakness in the construction sector appears to be a key factor.
It now appears certain that 2000 saw the peak of the economic boom. Growth at the beginning of this year was running at an annual rate of more than 12 per cent in terms of Gross Domestic Product. Such a rate was not sustainable and it now appears possible that 2001 may end with the economy effectively stalled and growth grinding to a halt. It is even possible that if data was available showing the quarterly movements of output on a seasonally adjusted basis - a trend not measured by Irish statistics - it might indicate the immediacy of a short period of recession (defined as two consecutive quarters of negative growth).
The Government may be tempted to use the downturn as an excuse to initiate further tax cuts to stimulate the economy. However, it will have to choose its options very carefully..
Above all else, the Budget might return the public finances to a sustainable path. Ongoing increases in tax revenue of almost 4 per cent along with current spending increases exceeding 24 per cent are simply not sustainable. As a result, the Government will have to make a very 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?
What is clear is that there is no case for further reductions in the top rate of tax and that tax cuts, if any, should focus on taking those on the minimum wage out of the tax net. This may be a difficult Budget for Mr McCreevy; his priorities must be the stability of the public finances and ensuring value for money in spending targeted at improving public services.