Thriving economy expands coffers and gives Minister huge scope in Budget 99

The economy has been doing so well that the Minister for Finance will be able to aim for an increasing surplus, substantial spending increases and large scale tax cuts on Budget day next month.

Over the coming weeks, the Minister is likely to unveil figures for 1999 which will include current spending of more than £11.5 billion, a £1 billion surplus on the Government's finances and £400-£500 million in tax cuts.

The first round in the official run-up to the Budget will be the publication of the Book of Estimates next Wednesday. This is likely to show a rise in current spending of around 5 per cent as public sector pay continues its inexorable rise.

But the Minister will be able to bring this rise back almost to his official 4 per cent limit when reduced payments on the national debt, among other items, are taken into account at the time of the Budget on December 2nd. If spending remains on course for the rest of this year, it should come in under target allowing Mr McCreevy to permit expenditure slightly above this target in 1999.

The rise in spending will also leave room for £400-£500 million in tax cuts on Budget day. The details have not yet been finalised by the tax strategy group, but the Government is likely to deliver the greatest benefits to lower- and middle-income groups.

Following the formal signing off by the Cabinet on the spending estimates this week, the Minister will focus now on the precise taxation package to be announced on Budget day.

Substantial work is still being carried out on the idea of introducing new tax credits which would fundamentally reform the existing system. It would allow tax rates to be cut substantially without the Government being accused of favouring the better off. This avenue is being strongly backed by the Tanaiste Ms Harney and it is also favoured by Mr McCreevy. But there is some opposition from his civil servants and much will probably depend on the attitude of the Taoiseach, Mr Ahern.

Sources have clearly ruled out any increase in capital gains tax (CGT) which had been thought of as a possibility after SIPTU floated the idea in its strategy paper. CGT was halved to 20 per cent by Mr McCreevy last year, despite considerable opposition from his civil servants and sources say he is very unlikely to back down this year.

The Budget will also be used to increase social welfare payments, pump hundreds of millions into infrastructural projects as well as advancing some of the measures to control house prices proposed in the Bacon report.

Overall, the Minister is likely to be very pleased with the results of the estimates round. Following intense negotiations he will be able to bring spending growth in under an average of the 4 per cent target over two years.

In some key areas, such as health and education, the budgets will grow by more than 4 per cent. But sources say that many Ministers did not actually win additional funding and have merely gone away with what is called "no policy change", or NPC rises, which effectively allow for existing services to continue and pay rises to be awarded.

The Minister for Health, Mr Cowen, again won a large slice of the cake with approval for an increase of more than 7 per cent which is needed simply to maintain the status quo and pay nurses the amount already agreed. Additional money awarded on top of that rise will allow for waiting lists to be cut and boost the increase in health spending to almost 9 per cent.

But Education Minister, Mr l Martin, fared slightly worse. Much of his overall increase of approximately 8 per cent will be required to maintain existing service and only around £10 million will be available for any new initiatives. However, he did win substantial funding as a part of the capital programme for a primary school rebuilding scheme.

Overseas aid also fared less well and the Government is now understood to have backed away from the percentage of Gross Domestic Product formula for aid donations which has been in use over previous years. This means that while the absolute amount of aid will increase, the percentage will drop from 0.31 per cent of GNP last year to 0.29 this year. This effectively kills off any hope of the Government reaching its stated target of 0.45 per cent by the end of its term in the year 2002.

Departments such as Minister Sile de Valera's Arts, Heritage, Gaeltacht and the Islands, have also fared rather badly. Ms de Valera may also be suffering as the Department of Finance attempts to claw back some of the benefits given reluctantly to her predecessor, Mr Michael D Higgins, when he was minister.

The Public Capital Programme will be published at the same time as the Book of Estimates. Last year, Mr McCreevy effectively threw out his 5 per cent cap on capital spending in the Programme for Government by announcing a 17.5 per cent rise. This year he can be expected to increase it even further and a figure of more than 20 per cent is now in the pipeline.

In fact, this may be even smaller than the Minister was prepared to allow. Most of the major transport projects for Dublin are three to five years away from completion and cannot be allocated much money. On top of that the £20 million allocated to Luas last year was not used and is likely to be simply rolled over to 1999. But the Department of Public Enterprise should be pleased with the extra funding secured for Dublin Bus among others in a bid to solve Dublin's traffic crisis.

Many observers feel that the capital budget should be larger again and public figures such as Dr Michael Somers, chief executive of the National Treasury Management Agency, have called for the £1 million surplus to be used on improving infrastructure rather than repaying debt. But others such as ABN Amro's chief economist, Dr Dan McLaughlin, point out that it is iniquitous in an economy where the PAYE sector is massively over taxed that an extra £1 billion is taken from them.

A recent study by IBEC found that £14 billion would be needed to fully finance all the state's infrastructural needs but much of this cannot be implemented immediately. Last year, £57 million of the Budget expenditure went to roads, particularly in Co Kerry. A further £20 million was allocated to the redevelopment of Ballymun, while £100 million went to a high-tech education fund. Other areas will be hoping for similar funding this year. And a substantial amount is likely to be allocated to the primary school sector for the rebuilding and new building programme.

Inevitably, the largest portion of the spending increases provided for in the Budget will actually be used to fund the public sector pay bill. Only last year the Minister himself noted that 9 per cent increases in the cost of public sector pay were simply not sustainable without other parts of the economy suffering.

Nevertheless, the pay bill will have increased by more than 9 per cent again this year - almost £200 million more than budgeted for. That is on top of a 10.5 per cent rise in 1997.

How much is pencilled in for next year will only become clear next week but it is likely to be another substantial figure. The Department of Finance is hoping to avoid another increase in the region of 9 per cent, but this would be required if nurses and others groups were successful in their campaigns for wage rises.