Minister forced to blink as figures fail to add up

Mr McCreevy's late admission that we are in the red has prompted a debate on how bad the damage is and how it is to be addressed

The admission, when it finally came, was startling in its brevity. The Minister for Finance, Mr McCreevy, said tax revenue was not up to scratch and that "an Exchequer deficit is in prospect".

The two-line statement, backed as it was by two pages of irrefutable statistics, was admirably simple. Money is not coming into the public purse fast enough to cover the the money flowing out. The difference, Mr McCreevy's officials warned, was likely to amount to €750 million at the end of the year.

This deficit, however much it actually turns out to be in the cold light of January 1st, will be the first to be registered since 1997, and thus the first for which Mr McCreevy must take full responsibility.

Until Wednesday, his repeated projections were that the Exchequer balance would be in surplus this year, albeit to the limited extent of €170 million.

Now that the truth of the situation has emerged and the initial political dust has settled, two major questions naturally rear their heads: how did we get from a small surplus to a €750 million deficit within a matter of months? And, perhaps more significantly, where do we go from here?

The transition from surplus to deficit is a hard one to understand, with a significant lack of relevant information coming from Mr McCreevy's department on the subject.

What is clear is that tax revenues, particularly in the crucial areas of income and corporation tax, are well down on the numbers the Minister foresaw when he was drawing up his budget last year. The Department of Finance now admits tax revenue is set to be €1.3 billion lower this year than it was in 2001.

From the Minister's perspective, you might say that it makes sense for your prediction of a surplus to be thrown out of kilter if the basis on which you made it - the tax take - has disintegrated.

This, of course, raises the subsidiary question of why the Minister and his officials built their budgetary house on such uncertain foundations. The most obvious response is that they were making their predictions at an unfortunate time. The September 11th catastrophe had just happened, and it was as yet impossible to work out which course the economy, both global and domestic, was going to follow.

In the event, they chose a more rosy scenario than the one that actually came to pass, with the result that the tax take from wages and profits has not been as high as they had hoped.

This theory is as yet relatively difficult to support with statistical evidence.

Unemployment numbers, for example, have not risen dramatically, with the last National Household Survey showing that 33,500 more people had jobs in the second quarter this year than one year earlier.

The numbers of hours worked by those holding the jobs declined slightly, but hardly enough to explain a major fall-off in income tax.

This leaves us to speculate on other ways in which tax revenue may have shrunk, such as fewer employers paying bonuses, or a growth in black economy wages, where only part of the tax due is handed over to the Revenue Commissioners.

As for corporation tax, the hole is also explained away through anecdotal evidence, with businesses, particularly those with international exposure, thought simply to be making less money. Again, there is as yet scant hard numerical support for this presumption.

One thing that we do know for sure is that a significant drain on income tax is coming from the Government-sponsored special savings incentive accounts.

The payment of the Government bonus under the scheme will account for €425 million of the tax shortfall this year, a proportion more than 200 per cent higher than had originally been envisaged.

The other we know with certainty is the rate at which the Government is spending money. Current spending was running about 20 per cent higher at the end of September this year than it was in 2001, compared to an annual target of 14.3 per cent.

Mr McCreevy's officials said that the biggest problems here came from the Departments of Health, Environment and Justice.

They insisted on Wednesday that 14.3 per cent was still an achievable goal, but resolutely declined to expand on how it could be so, leaving commentators to speculate on opportunities to "push out" spending into next year.

Whatever strategies are adopted, however, the residual picture remains clear: the Republic is in the red, despite Mr McCreevy's repeated assurances that we would be back in the black by the end of the year.

Going forward, and setting aside all questions about the Minister's willingness to paint a realistic picture for the public, the best thing to do with our projected €750 million deficit is to put it into context.

Dr Dan McLaughlin, chief economist with Bank of Ireland, reckons it will equate to about 0.5 per cent of GDP this year, a percentage that he says is laughably small compared, for example, to the 4.1 per cent deficit run in Portugal last year, or the 1.4 per cent deficit registered by the euro-zone as a whole.

"Do we sacrifice infrastructure for the sake of not running a deficit?" he asks, noting that, while Mr McCreevy's commitment to a small surplus may have been "unwise" in the context of capital spending commitments, the error in calculations is reasonable on a margin-of-error basis.

Mr Alan McQuaid, chief economist with Bloxham Stockbrokers, is less understanding, arguing that the Government has simply been "overly generous" in recent years and now needs to make amends.

Mr McQuaid proposes that some of the €1 billion plus due to the National Pensions Reserve Fund this year be held back, at least for now.

He also suggests that serious consideration should be given to scrapping the SSIA scheme.

Also calling for change is Mr Austin Hughes, IIB Bank economist. He says modest borrowing can only be justified if public spending can be controlled.

"It must be remembered that the key task of the Minister for Finance is not to deliver a surplus each year. It is to manage," says Mr Hughes, who has long been been predicting a 2002 deficit of up to €1 billion.