Cantillon: Figures look good but warning shots can be heard

Ministers Michael Noonan and Brendan Howlin had to tread a delicate balance in drawing up the budget. There is an election coming up after all. But at the same time a key part of the Government’s “sales pitch” is that it is the responsible economic manager and that other parties would only wreck everything.

Last year the Government took a bit of a risk with this year’s budget – spending €1 billion in cutting taxes and increasing expenditure. It paid off because tax revenues were so strong that warnings it should have taken a more cautious route were blown away by the surge of cash into the exchequer.

This year it wasn’t quite double or quits but the Government added €1.5 billion to spending and then, in the budget, added the same amount via tax cuts and spending hikes. Next week’s tax returns for October will give the first signal whether the strategy will pay off again.

Two warning shots, however, reported in today’s paper, bring an interesting perspective. Outgoing Central Bank governor Patrick Honohan warned Noonan before the budget that the current GDP and GNP figures were overstating the rate of economic progress. A better measure was the employment data, he said, which had shown strong gains but still showed employment levels 10 per cent below pre-crisis levels.

UCC economist Seamus Coffey added some flavour to this on Friday, warning that the Government might be basing its future spending plans on transient corporate tax revenues. The large bulk of the overperformance in tax last year was due to corporation tax, he said, and it was simply not clear that this would be sustained. Coffey said experience had shown that such revenues could disappear as quickly as they appeared in the first place.

For Noonan and Howlin they key thing is that the figures continue to look good heading into the general election. With the poll likely in February, the tax returns for October and November will tell a lot.