McCreevy's garden is smelling of roses

Who'd be an Opposition politician with Charlie McCreevy as finance minister? The Minister presided over massive Exchequer surpluses in 1999 and 2000, which allowed a huge boost to spending before the last election. And now, having endured the pain in the earlier years of the current Dáil, the omens are looking good again for the Government, writes Economics Editor, Cliff Taylor

The forecast for Exchequer borrowing this year of €2.8 billion now looks very pessimistic. Provided economic growth remains reasonably buoyant, the outlook for Exchequer finances over the next few years is for modest borrowing at worst and perhaps even a move back into surplus, certainly when taking the general government deficit ( GGD). This measure of borrowing is lower than the traditional Exchequer borrowing requirement, mainly because it excludes the Exchequer contribution to the National Pension Reserve Fund.

So while our big EU partners are struggling to get borrowing down to the 3 per cent Maastricht deficit guideline, it is not inconceivable that the GGD could be in balance here or even in small surplus this year.

There are a few caveats, of course. Forecasting the Exchequer finances can be a tricky task - last year prophecies of doom in the early part of the year, for example, were proved completely wrong by the end of December. Even the Department publicly stuck to a mantra that significant borrowing would be incurred, even as the tax figures suggested otherwise.

The combination of trends evident so far this year could take a turn for the worse. But it doesn't look likely, with one exception. This is capital gains tax receipts, where revenues of €450 million in the first five months were more than twice expectations. The surge in tax in this area partly relates to a change in payment dates, but the extent to which it overshoots the target will almost certainly decrease as the year goes on.

More encouraging are the trends in the bigger tax headings. Income tax is running 22 per cent ahead of last year. Even if the once-off payments from the Revenue voluntary disclosure scheme are deducted, the annual increase is still 17 per cent. VAT, meanwhile, is running 9 per cent up on 2003 and is also ahead of target. Whatever way you look at these numbers, they only provide encouragement about trends in the jobs market and consumer spending.

As ever, there are risks to the underlying improvements driving tax revenues higher. Rising crude oil prices are threatening growth and could give prospects a knock, for example. And yesterday's figures show that notified redundancies are running 8 per cent up on last year's levels. The income tax figures, however, suggest that job creation is even more significant.

Given any kind of favourable world economic wind, the outlook for the public finances looks good. Tax buoyancy may ease but, as long as its growth continues to exceed the rise in spending, things can only improve. In the first five months, tax revenues were 15 per cent ahead and voted spending was up by less than 5 per cent, hence the improving picture in the finances.

The ebb and flow of tax revenue is something over which the Minister has limited control. The parsimony in not fully indexing tax credits and the standard rate band in the last Budget now looks misplaced, but it has only a limited impact on the overall trend, which is driven by developments in the wider economy.

The infamous stealth taxes have raised a few hundred million, but this pales into insignificance when compared with the €4.9 billion garnered so far this year from VAT.

Perhaps the most significant transformation is on the spending side. Before the last election, the boom in tax revenues meant that the spending departments got the upper hand. Current spending was increasing by 20 per cent plus per annum at its peak. This surge did not deliver value for money, though it surely helped to get the Fianna Fáil/Progressive Democrat Government re-elected.

The pain in correcting this trend was taken in the early years of the new Dáil. There was - and continues to be - much angst as spending growth was slowed from the soar away pre-election levels to the 6.7 per cent recorded last year.

The Budget for this year is for voted spending - the bit under Government control - to increase by just over 7 per cent. So far it is running just 4.6 per cent ahead of last year.

The Department of Finance says that timing factors are involved here, suggesting that the underlying increase in spending is a bit higher than the figures indicate. It is clear, however, that the Department is now firmly back in the box seat and is keeping a very tight rein on spending across all areas.

Will this change as the Dáil moves into its second half and the next election - due by 2007 at the latest - draws near? The temptation will certainly be there for the Government. Whatever the buoyancy of revenue, we are not heading back to the multibillion surpluses seen in 1999 and 2000. But there will be scope to ease the reins on spending somewhat over the next few years, in the hope that the electorate forgets the post-election cutbacks.

Voters will be sceptical, however. The problem with the big boost in spending before the last election was that it didn't deliver noticeably better services. Most famously, €53 billion was spent on the health service between 1997 and 2004 increasing health's spare of total spending from 19.2 per cent to 24.9 per cent, but service levels did not improve commensurately. Big benchmarking payments were not tied properly to productivity improvements. Major projects like the LUAS have run late and over budget. And at a local level, promises of school buildings were promised before the last election, postponed after it and are only now starting to come back on track.

The Government is grappling with this value-for-money issue on a range of fronts, not least in embarking on a major reform of the health service.

Ministers will surely realise the key issue - it takes more than a wad of cash to improve public services. Next time around, money may not buy votes as the punters look for real improvements in key areas such as health, education and infrastructure.