Exchequer squeeze causes cuts and project delays

Analysis: Latest Exchequer figures throw some light on the reasons for cutbacks in the health service, writes Cliff Taylor, Economics Editor

Cutbacks in areas of the health service and delays in major investment projects are put in context by the latest Exchequer figures.

Total spending in the first five months was just 7.3 per cent ahead of the same period last year, with spending voted through the Dáil up just 4.2 per cent.

This represents a sharp slowdown in the rate of growth in spending and inevitably the squeeze is being felt in some areas of service provision and in delays in investment projects.

The pressure to keep a tight rein on spending will not ease over the coming months, given the poor trend of tax returns.

Overall tax revenues in the first five months at €11.502 billion are 2 per cent below the forecast made at the start of the year for the period.

Income tax is the main area of weakness, with receipts of €3.151 billion running 10 per cent below the same period last year and 6 per cent below expectations at the start of the year.

Economic analysts express some surprise at this weak trend, given the steady performance in overall employment levels in the economy.

However, falling overtime and bonuses may be a factor, while Dr Dan McLaughlin, chief economist at Bank of Ireland, says the Department may need to readjust its forecasting model in this area.

Elsewhere, VAT receipts remain firm, up by nearly 12 per cent on last year, while excises remain weak, running just slightly behind last year's level. On the face of it, it is difficult to reconcile strong VAT and weak excises, as both rely on consumer spending.

Spending on excisable products such as tobacco and alcohol may be weak - partly reflecting tax increases - while some economists feel that black market sales of tobacco and alcohol products may also be increasing.

Strong home sales also appear to be one factor in supporting VAT.

The other key feature on the revenue side is that the Government is not benefiting from the transfers from the Central Bank and Social Insurance Fund, which supported the Exchequer position in 2002.

The net result is Exchequer borrowing of €1.24 billion in the first five months, compared with a surplus of €55 million for the same period last year.

Overall, economists feel the Government can still hit its €1.87 billion borrowing target for the full year, but warn it will not be easy.

Spending pressure will remain, according to Mr Jim Power, chief economist at Friends First, due in part to the first phase of the benchmarking pay increases to public servants.

Of course, fiscal consolidation is not ideal in a slowing economy, but the difficulties facing the Government are due in large part to its lack of spending control in recent years.

This has made adjusting the public finances to slower growth all the more difficult.