I want to put forward a proposition that may at first seem to defy common sense. That, although our economic growth rate in the next decade is going to be about half what it was in the decade or so after 1993, nevertheless, at unchanged tax rates, the volume of resources available for public spending will be very much greater than it was during that period, writes Garret FitzGerald
Don't switch off. Please read on while I explain why this is not merely possible but in fact almost certain to happen.
First of all it should be recalled that between 1993 and 2004 - the latter year being the latest in respect of which national accounts data for the public finances are currently available, and also, conveniently, the base year for the ESRI's latest medium-term review of our economic future - the burden of taxation was reduced by one sixth, from just over 42 per cent to 35.5 per cent of national output.
As a result taxation in 2004 yielded €6 billion less than would have been the case if tax rates had remained at their 1993 level. In the same period successive governments also turned a small current budget deficit into a substantial current surplus - which was then used constructively to finance greatly increased capital investment.
I think few people realise the huge impact that these two developments, both desirable of course, even if one could argue about the precise scale of the tax reductions, had upon the availability of resources for public spending during that 11-year period. They reduced by over 40 per cent the additional resources that would otherwise have been available for public expenditure. Today, with our burden of taxation reduced to the lowest level in Europe, no more resources need to be set aside for further tax cuts in the decade ahead. And while it may be desirable to provide for some increase in the level of the current budget surplus for public investment purposes, (and also, perhaps, to build up a pension reserve for the future), the scale of any such increased provision should be very much smaller than was required post-1993 to turn a current budget deficit into a substantial current surplus.
For these reasons the absolute amount of national resources available for public spending in the next decade is likely to be much larger than in the post-1993 period - in spite of the halving of our growth rate in the years ahead.
Using the national accounts for 1993 and 2004, together with the projections to the year 2015 contained in the ESRI's most recent medium-term review, it is possible to show that without any increase in the present low burden of taxation, the volume of resources likely to become available for current public spending in the 11-year period between 2004 and 2015 is likely to be somewhere between 40 per cent and 70 per cent greater than the public spending increases of the Celtic Tiger period.
The figures are set out in the table below, where they are expressed in terms of constant 2004 money values - thus eliminating the effects of inflation and showing the outcome in volume terms.
The table provides two alternative sets of data for the year 2015. The first is a "high" set of figures, showing what the outcome might be if nothing goes wrong with our economy during the next decade. The second sets out what the ESRI believes might be the outcome if we were to face either a collapse of house construction in Ireland or a sharp fall in the dollar due to a failure by the US administration to tackle their huge current external payments deficit. (If both of these were to happen simultaneously the outcome might, of course, be somewhat worse than that shown for the low growth scenario).
Of course, both these projections assume that during the years ahead our economy is well managed. The very favourable medium-term prospects for the availability of resources to finance a considerable expansion of public expenditure in the decade ahead could be set back by injudicious action in next December's pre-election budget.
At present our economy is very vulnerable because we are experiencing a consumer boom which has led to the re-emergence of an external payments deficit. Last year the volume of retail sales rose by almost 5 per cent, and jumped by a further 6 per cent between December and January, after allowing for seasonal factors. Moreover, the release of the SSIA money is now about to start peaking in 12 months. So, the last thing we need is a giveaway pre-election budget in eight months' time .
The frustrations of recent years, when slower growth in 2001 and 2002, and not just one but two successive irresponsible election budgets, created the need for spending cuts, need not recur. If our politicians keep their heads they will find that resources will soon become available to enable them to cater for the pressing needs of both under-funded public services and inadequate social provision.