New minister sitting comfortably as the revenues flow in

ANALYSIS: Expectations are high in the run-up to the Budget, writes Cliff Taylor,  Economics Editor.Analysis

The Life of Brian should be fairly comfortable in his new office in Merrion Street - at least initially. Department of Finance officials did their best yesterday to try to play down the outlook for the public finances, but there is no doubt that Mr Cowen now faces into his first Budget in a strong position.

The improvement in the public finances is based in large part on a solid - if not spectacular - recovery in the economy. However, Department of Finance officials point out that a number of one-off factors have also benefited the arithmetic, most notably the Revenue scheme to collect undeclared offshore funds.

This has had a significant impact on the figures. Total tax revenue is running 12.4 per cent ahead of last year, but subtracting the one-off factors - principally the Revenue scheme but also a once-off rise in capital gains tax - this increase falls to 9.4 per cent.

At the start of the year the expectation based on budget figures was that in the first nine months tax would be 4.9 per cent ahead of 2003 levels, so even allowing for the factors which will not repeat themselves next year, the picture is encouraging.

The tax take reflects a generally improving economic picture. Income tax - up 21.4 per cent - has been boosted by the Revenue scheme, but even allowing for this it is well ahead of expectations. VAT is also running ahead of target, as is excise and stamp duties. Only corporation tax is disappointing, though with 40 per cent still to be collected in the latter months of the year, the jury is out on its performance.

The Department expects taxes to outperform the budget target by €1.8 billion, though this will be offset a bit by a €200 million shortfall in non-tax revenues, due mainly to lower than expected receipts from the EU.

With spending expected to come in broadly on target, the Department now expects the Exchequer to have to borrow €1.2 billion, less than half the €2.8 billion forecast made on budget day. Using the EU general government measure of the public finances - which does not count the State contribution to the National Pension Reserve Fund - the Department now expects the finances to record a small surplus.

Next year, of course, the Exchequer finances start off with a clean slate. The strong performance means that the tax forecasts for next year start from a higher base (although bear in mind that the Revenue scheme receipts will not recur). However, the key thing will be the forecast for economic growth made by the Department of Finance, from which the tax revenue estimates for 2005 will derive.

Despite the latest bullish forecasts from Dr Dan McLaughlin of Bank of Ireland, a senior Finance official contended at yesterday's press briefing that "to talk of the Celtic Tiger is not really appropriate at this time".

Growth in the boom years was 8-10 per cent per annum, whereas now it is 4-5 per cent. And there are uncertainties, most notably whether the international outlook will be derailed by higher oil prices or a setback in US growth.

Domestically, the booming housing market is a key factor boosting tax receipts, mainly through its impact on VAT and stamp duties. If the house market slows, then taxes will suffer. Elsewhere, growth is ticking along, but consumer spending remains subdued enough.

These are the caveats. However, if the economy can keep growing at roughly its current rate, Mr Cowen should have enough on hand to afford a reasonably generous tax package, including the indexation of the income tax system and special measures aimed at lower earners.

On the spending side, the indications are that current spending on Government services will be on target, even though it is currently behind schedule. The question facing Mr Cowen is whether to hold the growth in spending to around 7-8 per cent next year - staying within commitments made in Sustaining Progress - or whether to go for a significantly higher figure in an attempt to deliver noticeable improvements in services.

The indications are that he will take the conservative route, though the spending estimate for next year, due to be delivered in November, will tell the tale.

On capital investment spending, a five-year programme is already under way. However, it looks as if some money - about €50 million on Finance estimates - will not be spent in 2004 and under new rules can be carried forward to next year. Under the new multi-year programmes, this money will be counted against 2004 spending, but the outlay can actually be made in 2005, allowing the new Minister to deliver some good news on investment in his first Budget.

The only problem for Mr Cowen is that the headlines about boom and bloom have created considerable expectations about his first Budget. He won't be able to please everybody, but deciding where to spend money isn't the worst of problems to have.