Sudden surge in growth means budget expectations have taken off

On Merrion Street yesterday, an eminent Government figure mimicked a spacecraft hurtling towards the sky as news emerged that annual economic growth surged by 7.7 per cent in early summer. More than two years have passed since Michael Noonan claimed Ireland would “take off like a rocket” if the global economy picked up. Well, this looks like it alright, even if the outside world is not in the best shape.

Impressive as they no doubt are, these figures come as something of a surprise. At the Fine Gael think-in in Co Cork last week, Noonan upgraded his official 2014 gross domestic product growth forecast to a little north of 3 per cent. Seven days passed and the Minister for Finance called reporters to Government Buildings to say he now expects annual growth to reach some 4.5 per cent. That’s more than twice the 2.1 per cent projection underpinning the current budget.

Take note that Government number-crunchers generally work on the basis that a 1 percentage point rise in gross domestic product delivers some €1.6 billion in additional tax revenue. All of this suggests Noonan and Brendan Howlin, Minister for Public Expenditure, will be flush with cash as they finalise next month’s budget.

If buoyant tax revenues in August prompted a titantic Government effort to damp down any clamour for a giveaway on October 14th, the task is a good deal more difficult now. Senior coalition figures looked to quarterly national accounts yesterday for “belt-and-braces” evidence that the recovery was taking hold. They got belt and braces alright – and shoeshine too – but now they have to deal with the consequences .

They go deeper and deeper into the realm of expectation management, always a dark art. There are no guarantees in this scene but another positive set of tax returns this month would only add to the pressure for an appreciable recovery dividend. A “neutral” budget – in which every euro gained is offset by another euro paid – is not quite the reward sought for all the pain taken since the crash.

Here is the dilemma: the Government is eager to claim credit for the progress made, while limiting the fruits of same and imposing a new water charge at the same time. Any income tax concession next month would be minimal, with a view to bigger gains this time next year.

Tangible real

ities

Yet the Coalition is not at one as to how that might be achieved. Fine Gael has designs on the higher income tax rate, but Labour wants to tackle the universal social charge. To be sure, this is not the worst kind of debate to be having. After years of grinding cuts, however, there’s no way of pleasing everyone. In saying this, one of the biggest problems the Government faces is that many people do not feel the turnaround day by day. You can’t spend GDP growth.

Moreover, it’s not just the little people who want a reprieve. In the Cabinet chamber on Wednesday, Howlin told Ministers outright that their spending plans were unrealistic. For all the high moral talk of rectitude, however, he still pointed to “leeway” of €600 million on the spending front next year. This cash is destined for education and health, although Noonan and Howlin are reputed to have delivered another dressing-down to Minister for Health Leo Varadkar at the Cabinet over his public claims of budgetary distress. The begging bowl is best presented in private, it would seem, even if the eventual scope for “leeway” might be greater than anticipated.

Political cunning vs finance

At the heart of it all, there are two basic calculations. Deep as the electoral wound was in May, the Government would prefer to leave the bulk of any fiscal largesse to Budget 2016 next year. With a general election due by spring 2016, that is a simple matter of political self-interest. For all the incessant talk of sensible fiscal probity and the refusal to repeat the grave errors of the past, there is no getting away from that.

There is more, however. The sense lingers that the job is not done yet, that unemployment and the national debt are far too high and that fragility in the wider world is a constant danger. More than ever now, the prime task is to translate top-line growth into job creation and money in the pocket. Without that, the recovery is but a mirage.