Economic growth to pay for Cowen's social concern

The first Budget of a "socialist" administration? Well not quite. There is no doubt that the gains from Budget day are directed at lower earners and those on welfare. However it is not a "Robin Hood" exercise - the benefits are being paid for from the fruits of economic growth, in a package which has a little good news for everyone.

Not quite a lurch to the left, but a statement, nonetheless, of where the Government's priorities lie.

The Minister for Finance, Mr Cowen, was given some room for manoeuvre in framing his Budget package by the strength of the economy and the buoyancy in tax revenues. The interesting thing is where he - and his Cabinet colleagues - decided to spend the money. By concentrating on social welfare increases, tax cuts aimed at the lower paid and a disability package, the Cabinet has made a significant statement. The priority now - or for this year at least - is to address social disadvantage and to be seen to "make a difference" in targeted areas. Gone is Charlie McCreevy's free market agenda and in comes Brian Cowen's social concern.

The standard examples of Budget "families" are one measure of the percentage gains for different groups. However more telling is the graphic accompanying the Budget documents. It shows an analysis of the impact on the population of the Budget changes in taxes, social welfare and PRSI. This indicates an 8.8 per cent increase in disposable income for the least well-off 10 per cent of the population, a 7.8 per cent gain for the next ten per cent, falling steadily to a 1.2 per cent gain for the highest 10 per cent.

Of course in actual cash terms, the higher earners may still often get more - what the table measures is the proportional benefits for different groups.

It remains to be seen, of course, how this agenda plays out in the two Budgets before the next election - assuming the Government runs close to its full term. In particular it would be no surprise to see more largesse aimed at middle income earners in future packages. Many in this group will be a bit disappointed by the gains from Budget 2005.

The strength of tax revenue has allowed the Government to make progress on the social agenda this year, while still maintaining borrowing at a relatively low level. The target for the general Government deficit - the EU borrowing measure - at €1.2 billion is a bit higher than expected. However it is still less than 1 per cent of gross domestic product. And with borrowing expected to remain at roughly this level in the next few years, the Government is clearly hoping that Brussels will approve.

Technically this might seem a bit above the "close to balance" guidelines for the public finances in the EU Stability and Growth Pact. However with the proverbial coach and horses already driven through the pact, Brussels is unlikely to worry too much, particularly with the Irish national debt amounting to just 30 per cent of GDP.

Meeting the social agenda isn't cheap. The Government had committed previously to keeping the growth in current spending in line with the nominal growth in the economy, forecast to be a little under 8 per cent next year. In fact, gross current spending is now forecast to rise by just over 9 per cent. The difference is not significant. However what is important is that current spending increases of 7 per cent are pencilled in for the two successive years 2006 and 2007.

If growth and tax revenue remain buoyant, then this will be comfortably funded while still affording tax relief; if the economy hits a bad patch, then this strategy will have to be re-thought. Meanwhile the key question remains whether the Government can actually deliver better services. The new caring agenda will mean little if the number of people lying on hospital trolleys stays the same.

Delivery is also an issue in the Government's capital investment programme. Spending levels are forecast to rise to €6.4 billion next year, 20 per cent above this year's outturn. However the rise largely reflects a big undershoot in spending this year and the Government is finding it difficult to spend all the money it is allocating in this area. Better management is promised, but it would be no surprise if capital spending again runs below forecast levels next year. Again this has a political dimension - the Government has at most two and a half years to be seen to have an impact on infrastructure issues.

Perhaps the clearest demonstration of the Government's approach to trying to target a few key areas was its approach to the tax system. A relatively limited amount of money was available here, and the bulk of it was directed to increasing tax credits, taking all PAYE workers on the minimum wage out of the tax net.

However because so much was spent in this area, there was relatively little left for increases in the standard income tax rate band. The Minister managed a €1,400 increase in the single person's band, bringing it to €29,400. However this means that more than one third of taxpayers will pay at the higher 42 per cent tax rate next year.

It will be interesting to see if this area becomes the focus over the next couple of Budgets. The Minister made much play of prudence and maintaining growth. If economic growth remains buoyant he should be able to afford two more attractive packages before the next election, but recent experience shows how quickly the exchequer's fortunes can turn.