McCreevy's mission is not impossible

Analysis: Minister will have to raise a substantial portion of what he wants to "give away", writes Cliff Taylor, Economics Editor.

The Minister for Finance, Mr McCreevy, faces a difficult task - but not an impossible one - on the basis of pre-Budget figures published today.

Unlike any other Budget of recent years, the Minister will have to raise a substantial portion of what he wants to "give away" through tax reductions and higher spending.

He faces some unavoidable commitments - increasing welfare rates, adjusting the tax system to account for inflation and making some allowances for public sector pay benchmarking. However, through increasing excise duties, extra revenue from capital taxes and some measures to close off allowances, he should be able to bridge the gap and hold overall borrowing to a "prudent" level.

The pre-Budget figures show that Mr McCreevy will stand up next week already having to borrow €642 million to bridge the gap between revenue and spending. This is using the General Government Balance (GGB) measure of borrowing favoured by the European Union.

All the indications are that Mr McCreevy wants to stop this pre-Budget GGB from rising too much. He has a long-standing commitment to holding down borrowing and is likely to want to keep the borrowing target for next year below 1 per cent of GDP, or below €1.28 billion in cash terms. He might even feel a sub-€1 billion target would be appropriate

His two main extra current spending commitments on Budget day will be a package of social welfare increases - possibly costing up to €800 million - and public sector pay benchmarking. The latter is understood to have been the subject of intense political discussion.

The Minister is likely to pencil in at least €550 million to meet the commitment to immediate payment of a quarter of the total increases recommended in the benchmarking report, complete with backdating. He may say that any further increases will rely on the successful conclusion of talks on extra productivity in the public service. These talks are believed to be well advanced.

One other extra spending commitment is likely. Mr McCreevy is expected to allocate further cash for capital investment - mainly on road projects. The National Development Finance Agency (NDFA) is being established to advise on how best to pay for this. Extra spending will likely be funded through some additional borrowing - either directly or through the NDFA.

In some cases, where specific tolls can be raised to pay for investments, the NDFA may be able to keep the borrowing off the State "balance sheet" by establishing special purpose companies.

It is unclear how much extra Mr McCreevy can commit to this area but it is likely to consume several hundred million euro.

In the now-famous leaked Government memo, written last summer, extra spending of €1.9 billion was targeted for Budget day, above and beyond what had been allowed for in the Estimates. Given the tightness of the arithmetic, this figure may now be between €1.5 billion and €1.7 billion.

In terms of Budget-day cost, to this figure must be added the price of making some adjustment for inflation in tax credits and the standard income tax rate band, Each 1 per cent adjustment in these costs some €80 million, according to figures from Bloxham Stockbrokers, so a 3 per cent rise would cost some €240 million.

The total cost of the Budget tax and spending measures could be around €1.8 billion. And remember that before he even stands up, the Minister is already facing a GGB of €642 million. To hold this GGB to, say, €1.2 billion after the Budget, he would need to raise €1.2 billion on Budget day. This is by no means impossible.

Higher excises could raise €300 million to €400 million. As reported in yesterday's Irish Times, a change in the payment date for capital gains tax could yield a one-off gain of some €500 million and further changes to corporation tax payment dates are also possible. The remaining gap is likely to be closed through closing off a range of loopholes and allowances, perhaps some modest rises in capital tax rates and some extra revenue from PAYE taxpayers, through not adjusting credits and allowances fully for wage inflation and some changes in employees' PRSI.

It won't be easy for Mr McCreevy to close the last few hundred million of the gap, but his record suggests that he will do so, rather than letting borrowing increase too rapidly.

For complete coverage of Budget 2003, visit ireland.com's Budget site at: www.ireland.com/focus/budget03/