Estimates show will to cut current spending still weak

Despite all the huffing and puffing, capital spending looks likely to bear the brunt of cuts, writes Jim O'Leary

THE GOVERNMENT'S White Paper on Receipts and Expenditure, published over the weekend, is another reminder of the extraordinary deterioration that has occurred recently in the public finances.

A budget surplus of 0.5 per cent of GDP has been transformed into an expected 5.5 per cent deficit within a year, a turnaround of six percentage points. Not only does this have no parallel among the euro-zone states, but it is without precedent in the sorry history of Irish fiscal policy.

Even in the 1970s, when government budgets regularly went off the rails, the biggest one-year deterioration amounted to 5 per cent of GNP and took place between 1973 and 1974.

Turning to 2009, the White Paper suggests that the Minister for Finance will face an opening deficit of €13.3 billion - which is 7 per cent of GDP - tomorrow, that is before taking account of whatever tax and spending measures the budget brings.

However, this figure does incorporate the effect of adjustments to spending plans that the Government has already made, the scale and pattern of which are quite revealing.

Last year's budget set out summary projections of the current and capital budgets for the years 2008 through 2010. At the time, it was projected that net current spending would amount to €47.3 billion in 2009, with net capital spending projected at €11.7 billion. According to the White Paper, the corresponding figures for 2009 are €48 billion and €10.3 billion respectively.

The inference is stark: despite all the huffing and puffing, all the Cabinet meetings, it is now planned to allocate more money to day-to-day spending next year than was envisaged a year ago.

On the other hand, despite all that has been said about the importance of infrastructure and investment, the capital expenditure plans for next year have been cut by €1.4 billion or 12 per cent.

Of course, some of the changes to the spending figures are non-discretionary and correcting for these alters the picture, but not a lot.

Next year's current spending total, for example, is boosted - to the tune of some €1.5 billion - by the need to provide for higher interest payments with borrowing for 2008 and 2009 likely together to be €20 billion more than previously forecast.

When adjusted for the interest bill and related items, planned current spending for 2009 has been reduced by something of the order of €500 million, not much more than 1 per cent of the total. (this is before providing for increases in social welfare payments).

Given the scale of the overall fiscal adjustment that is required, this is small beer. But it is small beer that by all accounts required an awful lot of time, energy and jaw-boning to brew.

In the matter of where the axe falls, what's happening looks like a reprise of the late 1980s when capital spending bore the brunt of the cuts: between 1985 and 1989, nominal expenditure on the Public Capital Programme was reduced by over 20 per cent. In contrast, there was not a single year in which current spending was reduced in cash terms. Disproportionate reliance on capital spending cuts is not the only regrettably familiar refrain. Another are tax revenue projections heavily tilted towards optimism. In an earlier column, I suggested that the official expectation of a €6.5 billion shortfall this year was likely to be exceeded by perhaps €1 billion.

If I'm right, that in itself will impart a significant upward bias to the official 2009 forecast. This is compounded by the projection that tax receipts will decline by just 2.7 per cent between the two years, to reach just over €41 billion. A paper presented by Colm McCarthy and Rossa White in Kenmare at the weekend had tax receipts falling to €38 billion next year, on the basis of a forecast 3 per cent decline in real GNP.

The official tax revenue projection is obviously based on a less bearish assessment of economic prospects, probably a similar one to those recently published by the Central Bank and the ESRI. If so, the denizens of Merrion Street are much more likely to be disappointed than pleasantly surprised by the flow of economic data and the flow of revenue in 2009.

The opening deficit, as mentioned already, is put at 7 per cent of GDP. It would be easy to justify a figure in the 8-9 per cent range, but even the 7 per cent number presents a stiff challenge for the Minister tomorrow.

If his bottom line is to target a deficit for 2009 that is no bigger than the 2008 outturn, it will require him to present a budget that will withdraw another €3-4 billion from the economy.