The strength of Ireland's recent economic performance is reflected in the revised forecasts published yesterday by the Department of Finance. The news is almost uniformly good.
Economic growth - as measured by Gross National Product - is now predicted to be 4.2 per cent this year, inflation will be low at 2.2 per cent and the unemployment rate at 4.5 per cent will be well below the EU average.
Indeed in some respects the Department could be seen as conservative. It has predicted that the buoyancy of tax revenue will bring Exchequer borrowing to €1.8 billion, which is €1 billion below the target set on Budget day. Given that more than €600 million has been raised by a special Revenue incentive scheme for those with undeclared offshore cash and that most other tax headings are looking strong, this could be seen to be a little pessimistic.
There is no doubt that the economy has shown considerable resilience over the past couple of difficult years and that growth has picked up throughout 2004. However, some caution is needed. The US economy has slowed significantly in recent months and, while some easing in its momentum had been expected, the extent of the deceleration has taken forecasters by surprise. The picture has been further complicated by the recent rise in oil prices, which reached another record high yesterday. Current oil prices, if maintained, would slow growth in the industrialised world heading into 2005. However, if prices were to head sharply higher, then the outlook would be seriously clouded.
These developments call for some caution in looking at Irish economic prospects. The US may recover its growth momentum, oil prices may fall back and in a few months international growth may revive, with positive implications for the Republic. However, there is a risk - and the Department of Finance acknowledges this - that international growth could disappoint heading into 2005. This would hinder Irish prospects and affect tax revenue growth for next year.
There is no need for undue pessimism. Barring a sharp further increase in oil prices, the economy should enter next year in reasonable shape. And if international growth revives again, then our economy is well placed to benefit. However, Government ministers must be acutely aware of the risks as they start to plan the Budget for 2005. There will be some room for manoeuvre, but any move to significantly push up current spending growth would be mistaken. Spending is already increasing ahead of inflation and the key task is to ensure value for money and push through reform programmes to deliver better services. If there is one lesson that Fianna Fáil and the Progressive Democrats should have learned from the pre-election spending splurge it is that rapid increases in spending do not lead to commensurate improvement in services to the public and require painful cutbacks and adjustments at a later stage.