The decision of the Department of Finance to revise down its forecasts for economic growth this year comes as no surprise, even if the extent of the revision is a little more than expected. The Department's annual economic review and outlook predicts that Gross National Product will grow by about 1.5 per cent this year, a reduction from its Budget day forecast of 2.2 per cent.
The Department's revisions are sensible. The international economic environment remains weak, although there have been some recent hopeful signs that the worst may be over for the US economy. Even when the international recovery comes, however, it is likely to be gradual and uneven and it will take time for the Irish economy to benefit. Also, as the Department recognises, the loss of competitiveness in recent years may limit our ability to benefit when the upturn does arrive. The only positive revision in the review is for inflation, which the Department now expects will average 3.6 per cent in 2003.
As normal in its annual review and outlook, the Department gives little indication about what it expects for next year. This will be crucial, as these forecasts will underpin the tax revenue growth estimates central to framing the Budget. However the indications are that its forecasters will take a cautious enough view. Tax revenues this year will be €500 million below budget, they forecast, and many of the trends behind this will - such as sluggish consumer spending - continue well into next year.
This indicates that the negotiations between the Department of Finance and the other spending departments on plans for next year will be very difficult. The Department will try to keep control on day-to-day spending to stop borrowing from rising too sharply and to leave some cash for capital investment. Meanwhile the Government will be forced to look at raising more money from tax revenue, as happened in this year's Budget.
As this process gets under way, it is essential that the Government puts forward a strategy for protecting capital investment on major projects. This spending is crucial for our economic growth prospects in the years ahead. However the indications from the Exchequer returns so far this year and from the detail of yesterday's forecasts are that investment spending is running behind schedule this year. If this trend continues, it would be deeply worrying.
The budget situation facing the Government is difficult, but not impossible. It is essential that as it finalises its package in the months ahead, it follows through with its commitment to a multi-year investment programme. The Government has options in this area, through sensible borrowing, though partnerships with the private sector or possibly through investing money via the National Pension Reserve Fund. It is essential that these are fully explored and that investment spending does not fall victim to a big Budget cutback.