Huge surplus helps McCreevy deliver spending increases and tax cuts

The Minister for Finance will have an unprecedented £3.5 billion (€4.45 billion) at his disposal when he delivers the Budget on Wednesday.

Pre-Budget figures confirm the opening 2001 Exchequer surplus is £3.49 billion - £600 million higher than analysts expected.

The surplus means Mr McCreevy can deliver spending increases of about £500 million and tax cuts of around £1 billion and still end the year with a surplus of £2.7 billion or more.

Mr McCreevy is likely to spend the money on a major child benefit package of up to £500 million.

This will cost him around £125 million in 2001 as it will be payable from September only.

Large social welfare increases to compensate pensioners and others for inflation are also expected but will be funded largely out of the surplus on the social fund and will not affect net spending.

The Minister also has some £120 million from departmental balances - money which will be left unspent by Government Departments at the end of the year.

He also has room to spend up to £1 billion on tax cuts including cutting tax rates, widening bands, increasing credits and cutting VAT.

On a full-year basis the amount would be far higher but the cost of the tax cuts is less this year as they only apply for a nine-month period from April to December, as the tax year is changing to a calendar year basis.

A 1 per cent cut in VAT is likely to take about 0.4 per cent off the consumer price index and would cost about £190 million in a full year or £133 million in 2001.

The anti-inflation package is also likely to include a savings package providing tax relief for regular long-term savers.

Increasing the credits or allowances would cost up to £450 million in 2001, while a £4,000 increase in the standard rate band would come to as much as £150 million.

Cuts in the tax rates could cost around £230 million.

Mr McCreevy has also allocated some €63 million for restructuring the VHI.

The huge surplus is largely the result of heavily revised forecasts from the Department of Finance which has a track record of underestimating growth and tax revenues.

It is now predicting that VAT receipts will rise by 15.5 per cent and personal taxes by 13.7 per cent in 2001. This would imply that the Department is expecting growth in gross domestic product of around 8 per cent next year, with inflation of perhaps 4.5 per cent.

Last year the Department seriously underestimated tax growth with a first estimate for personal taxation growth of 2.8 per cent, a figure which was progressively increased to almost 16 per cent.

This surplus or expected excess of revenue over spending is after the Minister has allowed for £765 million which will go into the Exchequer pension fund. On a similar basis to last year the pre-Budget surplus figure has risen by £1.6 billion from £1.9 billion last year

The funds do not include any provision for inflows from any privatisation of ICC, ACC, TSB and possibly Aer Lingus. The pre-Budget surplus is targeted to run at around 3.9 per cent per cent of gross domestic product, well above most other euro zone states.

When measured on the European basis as a general government surplus, the surplus is even higher as it does not include social insurance liabilities. The current surplus is 7 per cent of GDP so even after the Budget it could be around 2.75 per cent.