McCreevy gearing up for another financial `statement of intent'

The Government's presses, the airwaves and the newspaper columns are getting ready to unload a deluge of facts, news and analysis on the annual Budget. To keep a clear head, it is worth looking first at what the Budget is, and what it is not, and some key themes this year.

The Budget is not the fundamental act of the State, though it is essential to confidence in a government. It does not rank with epoch-making constitutional decisions, such as the ratification of the Good Friday Agreement. But nothing fails for a government like a Budget failure. It is a real measure of a government's ambition or caution, vision or myopia.

Formally, the Budget is a statement of intentions which are put into effect in the Finance Act in spring. With the estimates of public spending already published, the Budget shows where the revenue will be raised, and how the two will match.

That said, the Budget is not as little as a balancing of the books but not as much as the planning of all economic activity for the year ahead. It is, in between, a powerful influencer of business and economic decision-making.

The annual Budget is not an all-encompassing statement of what we as a society are, aspire to be, and will become. True, the Government is the largest single actor in the economy, making up about 18 per cent of gross national product expenditure; but that leaves the balance, 82 per cent, as the actions of private individuals and companies.

So whether we, as a society, are over-spenders on a consumption binge or prudent savers and investors for the future, is not mainly indicated by Mr McCreevy's imminent spending and saving decisions.

Nor is it an exercise in fine-tuned, precision social engineering by an omniscient government. It does, however, create incentives in certain directions, and sometimes powerful ones. Private choices and behaviour, rather than public policy, are still the dominant force in shaping what our society is and will become.

Even in its redistribution role, the Budget is not the simple and universal bell-weather of whether our society is caring towards less well-off people. Lower taxes have demonstrably improved the living standards and life opportunities of many thousands of people through long-awaited employment. The argument that the higher the tax rate on the well-off, the more just the society, loses all force. When lower taxes make unimaginably more revenue available for social purposes, the traditional zero-sum analysis of winners and losers is dead.

When spending is no longer a constraint on the delivery of health services and the focus shifts to management and structures, the Budget allocations are no longer the handy proxy of social justice they used to be.

And so, to this year's Budget.

Inflation: it seemed as autumn closed in that inflation was the first item on the economic and social agenda. Would Mr McCreevy and the Government take fright, and adopt a new emergency anti-inflation objective for the Budget, to over-ride, if necessary, election and partnership commitments? Classically, this would have meant cutting Government spending or increasing certain taxes.

The problem is that the Budget is not, and never has been, a precision weapon to counter inflation, and particularly inflation generated by international factors such as oil prices and the euro exchange rates.

The risk for the Government in making the reduction of inflation the top and over-riding objective would simply be that it wouldn't work, either soon enough or at all. The clear costs of having done so, politically and economically, would far outweigh only a chance of reducing inflation.

While the Central Bank could set interest rates, before we joined the euro, it targeted inflation. Before the break with sterling in 1979, when we also had no control over interest rates, the Budget was not used as a precision weapon to target inflation, because it just isn't such a weapon.

Instead, faced with inflation in the high teens, policy concentrated on wage restraint, particularly de-linking wages from consumer prices. This is the same today.

The fight against inflation is centred on making the wages element of the Programme for Prosperity and Fairness hold, including tax cuts to deliver take-home income increases. The Budget will be sold as anti-inflationary in that way. Tax incentives to encourage savings over consumption are a good idea too.

Tax rates and bands: who gains from rate and band changes is never going to be free of accusations that some gained more than others. That debate or argument would be better if it could accommodate both the needs of lower earners and the incentive effect of the top rate of tax for risk-taking enterprise.

The "who gains what" argument has to include "who pays what". Three per cent of income-tax payers earning more than £50,000 (€63,490) contribute over a quarter of income tax revenue, while nearly half of taxpayers contribute about one twenty-fifth. About three quarters of income tax revenue comes from the top rate, paid by about 500,000 taxpayers.

Childcare: this is the issue with the emotional kick this year, to replace individualisation last year. The Government can choose to put spending power in parents' hands as a support for their varied and personal choices for the care of their children.

Or it could favour particular types of childcare arrangements, in the pursuit of labour force objectives unrelated to the welfare of children themselves.

Finally, surprising and bold actions in a boom are possible and, though sometimes only symbolic, nonetheless welcome. Let us hope that in the number-crunching arguments and political cross-fire to come, there are some things to warm our hearts.