The long boom in the Irish economy is drawing to a close. The growth forecasts published yesterday by the Tánaiste and Minister for Finance indicate that the economy has reached a turning point. Over the next three years, the economy will take a step downwards, to an average growth rate of 3.5 per cent a year.
The immediate impact of the deceleration in the growth rate will be felt on Budget Day in December. The Budget for 2008 will be tough and for two reasons.
First, the Government is running hard to stand still on the expenditure front. As the Tánaiste pointed out yesterday, the Government will have to find close on an extra €2.3 billion just to maintain the existing level of public services during 2008. Thus, the increased cost of providing much the same level of public services as in 2007 will raise current public spending by 4.8 per cent in 2008. The principal factors pushing up the cost of existing public services next year are pay increases for public servants, population growth and the carryover costs of policy improvements introduced during the course of 2007. Thus, a large slice of next year's addition to current public spending has already been pre-empted. As a result, there will be precious little scope for improving the range and quality of public services next year - even if cash were not a constraint.
Second, the flow of additional revenue into the Exchequer's coffers will be subdued next year. Slower growth in economic activity means lower growth in tax revenues in the year ahead. Of itself, tardy growth in tax revenues virtually rules out any prospect of tax cuts. At the same time, weak revenue growth will act as a brake on the pace of current public spending growth.
For the Tánaiste has made it clear that broad budgetary balance is a central policy objective.
The impact of slower economic growth will be felt long after Budget Day. The Department of Finance is now forecasting that the real growth rate will average 3.5 per cent over the three years ending 2010. The election promises in the Fianna Fáil manifesto and the policy commitments in the subsequent Programme for Government were grounded on an annual average growth rate of 4.5 per cent over five years. The required growth rate is now unlikely to manifest itself until 2011. As a result, the Government will be forced to defer at least some of its expenditure commitments and tax promises for at least three years.
But while growth is forecast to moderate, it is not set to disappear. The economy is not on the edge of the abyss. While a national economic expansion rate of 3.5 per cent annually over the medium term represents a deterioration on the growth rates attained during the peak years of the boom, it is hardly a cause for national mourning.
In assessing the revised economic outlook, a sense of balance and proportion should be maintained. Growth is still significantly positive and, during 2008, Ireland will continue to see its economy expand at a faster rate than virtually all of its neighbours.