One of the problems about the timing of the Budget nowadays is that it has to be published before the end of the preceding financial year. This means that it has to be based upon estimates of the current year's out-turn, which may or may not turn out to be accurate, rather than upon actual figures.
I say "actual figures", but because Budget figures are based on cash rather than accruals and because expenditure can be brought forward from or postponed into the following year to make the figures look better in one or other of these years, the "actual" spending figures to be published in a month may not necessarily reflect the true spending outcome for 2002. All we have are the Minister's estimates of the out-turn of expenditure in the current year. These figures show an expected possible expenditure out-turn within 1 per cent of what was projected in last year's Budget for 2002.
Given that until the last couple of months, spending was running 7 per cent ahead of the annual budgeted increase, this is surprising. It seems to suggest that what had earlier appeared to be a severe overrun in spending during the current year may instead have involved a temporary radical change in the pace of spending during the the year, with much more of the intended expenditure occurring in the earlier part of the year than had previously been the case.
Such a change in the spending pattern within the year could, perhaps, be explained by electoral concerns - a tactic of spending a bigger proportion earlier in the year to give a false impression at election time of the availability of resources, in the hope of winning more votes.
Although spending is presented as having been close to last year's Budget forecast, revenue from taxes, other than excise duties and VAT, is expected to be £1 billion or 6 per cent below the budgeted level. The share of this shortfall attributable to income tax - 3.5 per cent or €340 million - is probably accounted for by the much larger-than-expected uptake of the SSIA scheme. However the remaining €700 million shortfall in capital taxes, stamp duties and corporate taxation - a drop of almost 10 per cent on expected receipts under these three headings - could reflect the down-turn in the economy during the year.
The fact that contrary to all expectations, the Minister has felt able to prepare a 2003 Budget based on an estimated out-turn for 2002 that includes no significant current overspending and no income tax shortfall other than that caused by his gross under-estimation of the cost of his SSIA scheme, explains why it is less "tough" than had been expected.
Next, it is interesting to look at the Department of Finance's view of our recent economic performance. This time last year, the Department estimated that the volume of gross domestic product in 2002 would rise by 3.9 per cent and inflation by 4.2 per cent, yielding an increase of over 8 per cent in the value of GDP for the year. It is now estimated that GDP grew this year faster than projected, by 4.5 per cent and with inflation over 1 per cent higher than was then forecast, the value of GDP this year is now estimated to have risen by as much as 9.7 per cent.
However, it needs to be said bluntly that these GDP figures give a totally misleading picture of our economic performance this year, for the bulk of this big increase in GDP is not due to increased output, but rather to an unexpectedly large outflow of profits from multinationals this year.
In last year's Budget documentation, the gap between GDP and gross national product, which is largely accounted for by this profit outflow factor, was estimated to rise this year by just under €1.5 billion. But this year's Budget documentation suggests that the actual increase in these outflows in 2002 will be over €4 billion.
WHATEVER the reason for this increased profit outflow, this phenomenon shows just how dangerous it is to use GDP figures as a measure of our economic performance.
Regardless of what the GDP data may appear to show, the increase in our GNP this year (the amount of output actually available to us in Ireland after deducting multinational profits), rose by only half the figure which had been expected at the time of last year's Budget, i.e. by only 1.8 per cent as against a projected 3.5 per cent.
What about our prospects for 2003? Last year's Budget documentation estimated the increase in the value of GNP in 2003 at 8.4 per cent. Although no figure for the volume increase in GNP in 2003 was explicitly provided, the fact that inflation was expected to account for 2.5 per cent of this increase shows that the expectation then was that the volume of GNP in 2003 would rise by 5.75 per cent.
A year later, the volume of GNP is estimated to increase next year by only 2.2 per cent.That is based on the European Commission's estimate of a 2 per cent rise in EU output next year, which assumes that European economic activity will pick up during the year ahead.
Although there can be no certainty about such a recovery in 2003, this projection appears to be a reasonable basis upon which to have prepared this year's Budget, especially as there appear to be tentative signs of a US recovery. If it develops, it should help to boost output in Europe in the second half of next year.
When the ESRI last summer prepared its latest medium-term forecast, they included together with a "benchmark" projection an alternative one setting out what might happen if there were to be a "sharp slow-down" in our economy. In the introduction to that document, written immediately after September 11th, the ESRI remarked that in the light of that appalling event, the "sharp slowdown" scenario "may be close to reality" than their benchmark projection.
That more pessimistic alternative projection by the ESRI suggested that a sharp slow-down could lead to growth in 2002 dropping back to 1.8 per cent - and that is precisely the growth figure now estimated by the Department of Finance for the current year.
One must hope that the GNP projections of growth rates of 2.9 per cent in 2004 and 3.8 per cent in 2005 prove to be over-cautious. In its "sharp downturn" projection, the ESRI expected growth to recover to over 5 per cent a year in 2004 and 2005. Just as the ESRI was right and the Department of Finance was wrong about this year, we must hope the same will turn out to be true of 2004 and 2005!