A State spending 'splurge' could hit economy

A politically motivated spending spree sparked by the Government's recent poor electoral performance is the biggest threat to the economy, a leading commentator warned yesterday.

Speaking at the launch of the Friends First Quarterly Economic Outlook, the institution's chief economist, Mr Jim Power, argued that the Government should stick to the low-tax/controlled-spending policy of the past seven years.

"The policy of low taxation has been key to the growth of the economy and needs to be maintained if the Government is to continue to generate the level of income growth necessary to bring public services and infrastructure up to acceptable standards," he said.

"A policy of sharply increased spending would be a major policy mistake that would have negative longer-term repercussions on the economy."

Mr Power said that he did not believe that any successor to the Brussels-bound Minister for Finance, Mr McCreevy, would be likely to make the mistake of embarking on a "spending splurge".

However, he warned that if this did happen, it would leave the State ill-prepared to face another global economic downturn, which Mr Power said was inevitable.

He pointed out that the current management approach, supported by the economic recovery, could leave the Exchequer with a surplus by 2006.

"That would leave the Government with the scope to deliver tax cuts in the second half of the electoral cycle, when it will have the most impact," he said.

He stressed that reform of the public sector had to be a priority if the Government wanted to safeguard future economic growth.

"Throwing money at various areas is not the solution to the problems and it often reinforces inefficiencies," he said.

But Mr Power added that, in order to reform the public sector, the Government would have to face down "vested interest groups that are very very strong and very very powerful".

On the economy as a whole, Mr Power said he believed that the "Celtic Tiger" was dead and had not resurrected, despite recent signs of increased growth and activity.

However, he increased his prediction for gross national product (GNP) growth for this year to 4 per cent from a 2.5 per cent forecast in February. He estimated that gross domestic product (GDP) growth would reach 4.9 per cent, an increase of 1 percentage point on his February forecast.

GNP is the measure of national income, excluding multinational profits booked here and ultimately repatriated, while GDP includes those figures.

Mr Power said he was perplexed at the continued strength of the housing market. He believed that there were indications that the market was getting some equilibrium but said there was no sign of a crash in sight.

"We had looked at house price growth of 6-7 per cent for this year," he told a press conference. "But, based on the evidence so far, it's likely that they will grow by 10 per cent in 2004."