McCreevy chooses investment over caution

The biggest surprise of this week's Government spending figures for 1998 was the dramatic increase in spending on capital projects. This is a welcome development and shows that the Minister for Finance is determined to put away at least some of the fruits of economic growth, even at the cost of - at least temporarily - abandoning his 5 per cent limit.

According to Mr McCreevy, the significant increase of 17.5 per cent in capital spending reflects the Government's determination to provide the social and economic infrastructure which is essential to underpin our continued development.

This is no more than many economists have been calling for for some time. The Economic and Social Research Institute warned in its recent mid-term review, for example, that some of the most significant potential blocks to our continued growth are infrastructural.

The roads are already choked up and the standard of living for many city dwellers will fall if commuting time increases much further. It may even become more difficult to attract emigrants home to congested towns and cities.

Mr McCreevy has allowed for the public capital programme to rise by 18.8 per cent in value terms next year with a 14.6 per cent increase in constuction-related spending.

The Department of the Environment is being given an extra £123 million. This will include £57 million to be spent on roads and £20 million on the redevelopment of Ballymun. The Department of Public Enterprise also received a boost to its capital budget with £20 million being allowed for work on the light rail project compared to £9 million in 1997.

The £100 million which has been allocated to the high-tech education fund is also welcome. Skills shortages have been appearing in the economy, which if left untended could lead to a sooner and sharper than expected slowdown in the economy.

It is clear that it will become more difficult to continue to attract high-quality technological industry, without the necessary numbers of graduates to support it.

After all, spending increases, if they contribute to the productive capacity of the economy, should not prove inflationary.

The argument on current spending is less clear. Mr McCreevy trumpeted his announcement stating that current spending had risen by only 1.8 per cent.

However, as readers of the letters pages of this newspaper may have noticed earlier this year, Dr Garret FitzGerald took issue with Mr McCreevy for his announced changes in calculating spending rises.

Effectively, Mr McCreevy decided to include the central fund in calculating the overall rise in current spending for the first time. The Opposition has already jumped on this.

But it should be pointed out that the previous government was also known to use the numbers to its advantage and bring spending forward from one year to a previous one to suit the number crunching.

Nevertheless, it seems clear that based on established practice Mr McCreevy's spending on current Government services in 1998 is actually budgeted to increase by 4.1 per cent.

More spending will be added on Budget day. But in a rapidly growing economy with expansionary tax cuts on the horizon it would be a brave Minister for Finance who added too much fiscal stimulus in terms of a Government spending spree.

But whatever the impact of rising spending on the economy, the continued escalation in public sector pay must be a cause for concern. As the Minister himself says, 9 per cent annual increases on average every recent two-year cycle simply cannot be sustained without parts of the economy suffering.

The other, though unstated, danger is that private sector workers may become tired of pay restraint in the face of what they see as large rises for those on the public pay roll.

In this regard the outcome of the public sector pay dispute involving craft workers, gardai and the defence forces may have a crucial bearing on the strength of the current Partnership agreement.

Of course, the Budget on December 3rd will be even more important. Mr McCreevy now has it in his power to radically transform our taxation system. It is just as important for the future of the economy that disincentives to work are removed from the tax system as it is that skill shortages are examined and acted on.

While there may not be enough money for Mr McCreevy to achieve all the necessary reforms in one year, he could certainly make significant progress by measures such as reducing the standard income tax rate, widening the standard band and increasing allowances to help lower paid and average income employees.

There is a less clear economic argument for reducing the top rate of tax although the political reality will probably dictate that the Minister gives at least a nod in that direction.

In addition, there is an argument that cutting the top rate would make it easier to attract emigrants back home from Britain and the US, which have less penal taxation systems.

Arguably, however, it is just as important to cut the corporation tax rate. Mr McCreevy could give a clear signal that he wishes to reduce it to 12.5 per cent by making a large and visible cut next month.

And as the estimates have shown, the one thing Mr McCreevy is not lacking is the funds to tackle many of the problems and bottlenecks in most areas of the economy.