The Irish populace is baying for U-turns on cutback policies. But do we really want the only alternative - huge tax hikes, asks Colm McCarthy

ECONOMIC ACTIVITY in Ireland has been flat or declining since the second quarter of 2007, and Government tax revenues have been reflecting this since the middle of last year.

Yesterday's October tax figures revealed relatively little - it is the November figure, when revenues are normally three times the October figure, that will tell the tale for 2008.

November is a VAT month and also the month when once-a-year revenues from self-employed income tax and other sources get paid.

But the October figures, for what they are worth, were poor, running 19 per cent below the figure expected by the Department of Finance.

For the nine months up to the end of September, the shortfall had been 11 per cent. The gap to October is €4.3 billion and the likelihood is that tax revenue for the year as a whole will be short by €6-€7 billion.

There is no solid reason for expecting any buoyancy in tax revenue next year, and some commentators are concerned that the Government's projected deficit, at 6.5 per cent of gross domestic product (GDP), is too optimistic.

The end figure for this year will be higher, perhaps 8 per cent, and not much needs to go wrong for next year's figure to be similar.

Any country which borrows 8 per cent of GDP for a few years can find itself on the slippery slope fairly quickly. The Irish economy is not competitive enough to recover automatically in line with the international upturn whenever it comes, and we may have to get used to sluggish tax revenues until that problem is addressed. It is against this background that the post-Budget protests and Government climb-downs must be seen.

The public appears to be thoroughly unprepared for a tighter fiscal policy. The apocalyptic reaction to relatively minor expenditure cuts in the Budget suggests that the mood of denial evident in Government until fairly recently has infected the body politic, and that the gravity of the fiscal position is simply not well understood. The Government's poor marketing of the Budget did not help, but there appears to be a deeper problem.

The pensioners' Woodstock was wildly disproportionate to the matter at hand. This was that wealthy older people were being asked to pay once again for GP visits and medication costs, as they had always done until the 2001 pre-election gimmick of free medical cards for all over-70s regardless of income.

Schoolteachers and farmers are next in line to campaign for climbdowns.

There seems to be no understanding that the expenditure boom of the last decade is over, since we are not collectively willing to see tax increases on the scale needed to meet the bills and balance the books.

The budget deficit next year will be of the order of the annual yield of income tax.

The objection to cuts implies that people are willing to contemplate tax increases on a quite implausible scale.

In 2008, gross current spending is up 12 per cent on last year, and a further 4 per cent increase is likely in 2009.

Yet some journalists are already talking about expenditure cuts in the past tense. In aggregate, there have been no cuts. The Government is miles away from solving its communication problem with the public.

• Colm McCarthy lectures in economics at UCD