Exchequer signals more cuts

The Government is still some distance from its Budget target and income taxrevenue has slowed significantly.

The latest Exchequer figures have given the Opposition some ammunition in attacking the Government's stewardship of the economy.

Despite what the Taoiseach, Mr Ahern, has been saying, the figures show that Government spending has been slowing and that there will have to be more swingeing cutbacks in the months ahead if it is to balance the books at the end of the year.

Government spending has slowed from 22 per cent in the eight months to the end of August 2001 to 18.9 per cent to the end of August this year, but is still some distance from the 14.5 per cent Budget target.

The slowdown will be welcome news for the Department of Finance and some economists believe that by keeping a tight rein on spending, the Government could yet come close to meeting its Budget targets. IIB chief economist, Mr Austin Hughes, takes this view but he cautions that there can be great volatility between monthly figures.

The cutbacks will hurt, and have left the Government open to criticism of having spent lavishly ahead of the election only to renege on some of its promises now.

The sharp downturn in tax receipts will provide further impetus for controlling spending. Yesterday's figures suggest that tax receipts have been growing well below trend at a rate of 1.1 per cent in the months to the end of August at a time when the Government had budgeted for an 8 per cent increase.

The most marked slowdown has been in income tax receipts, which were down 11.2 per cent, making the Department of Finance's revised figures for the tax yield this year look conservative. It had suggested that tax receipts would be €500 million below target but as they continue to be sluggish some economists believe the shortfall will swell to closer to €1 billion.

Dr Dan McLaughlin, Bank of Ireland's chief economist, takes a more upbeat view and suggests that tax receipts will accelerate in the late months of 2002 and that the Department of Finance's estimate could be met.

The Minister may also find some additional sources of revenue to flatter the figures. In the seven months to the end of August the Exchequer figures have been helped by the transfer of funds from the Central Bank and the Social Insurance fund. In the months ahead the Minister may opt to delay making certain payments to achieve the Budget targets. This could allow him to realise a modest surplus at the end of the year as the Department has predicted.

In an assessment of the prospects for the Irish economy, Dr McLaughlin yesterday suggested that the rate of economic growth will pick up in the coming months. This will be largely driven by an upsurge in investment by the business sector after a period of retrenchment in the wake of global uncertainty, he said. .

Dr McLaughlin has taken a more optimistic view than the Department of Finance about the potential for growth in the Irish economy this year.

He is forecasting growth of over 5 per cent this year compared to a 3.6 per cent rate now being estimated by the Department of Finance.

He believes the main driver will be exports and that economic growth next year could potentially be as high as 6.5 per cent.

Yesterday he described some of the commentary about the Exchequer finances as "hysterical".

Even if the Exchequer posts a modest deficit in 2002 and 2003 he claims it is not a cause for concern - in a period when the economy is growing below its potential and particularly when the source of that deficit is capital spending by the Government.