Cowen forecasts €1bn deficit for 2007

The prospect of a belt-tightening Budget for 2008 appeared closer today as Minister for Finance Brian Cowen forecast an Exchequer deficit of €1 billion for this year, almost twice earlier forecasts.

Mr Cowen described the Government finances as "tight" when publishing the new Pre-Budget Outlook, incorporating the Pre-Budget Estimates for Public Services in 2008

Detailing a 4.8 per cent rise in public spending required to maintain public services at existing levels nest year, the Tánaiste said it was now clear 2007 had represented a turning point for the Irish economy.

"While the economy has performed reasonably well in the first half of this year, the current indications are that the short- to medium-term outlook has changed vis-a-vis that envisaged on Budget day," he told reporters at Government Buildings in Dublin.

One key change is the slowdown in the residential housing sector and the impact this is expected to have on employment and tax revenues. Competitiveness has also suffered.

The pre-Budget outlook says the rate of new housing registrations and completions are strongly down, with the latter falling 25 per cent in August and July year-on-year. As a result, housing completions are expected to fall back to 70,000 this year, the first annual decline since 1993. In 2008 completions are expected to fall to under 60,000.

The impact of this on growth rates has led the Government to cut its GDP forecast from 5.25 to 4.75 per cent for this year. "Looking forward, GDP growth is expected to be 3.25 per cent next year and to average 3.5 per cent for the period 2008 - 2010," Mr Cowen said.

This means the Government will receive approximately €2.2 billion less in taxes next year than expected.

The impact of this lower growth rate will also be felt in slower employment growth and the report notes that there was a small decline in construction employment between the first and second quarters, leading to an increase in the rate of unemployment rate to 4.6 per cent.

Overall employment growth will be just 1.5 per cent in 2008, Mr Cowen said with unemployment forecast to rise from 4.5 per cent this year to 5.5 per cent next year, adding an extra 10,000 people to the Live Register.

He rejected a suggestion by a reporter that commitments in the Programme for Government were now under threat, stating that these had always been predicated on a favourable Bugetary position.

"The lower growth . . . will have implications for us all. But we mustn't lose sight of the fact that this performance is nevertheless impressive by international standards and one that many of our European partners would love to replicate."

Today's pre-Budget estimates set out the estimated cost of continuing what Mr Cowen described as the current level of services for 2008.

He said gross current spending next year on existing services will be almost €51 billion, an increase of €2.3 billion or 4.8 per cent over 2007.

Approximately a third of this increase is allocated to pay increases for public sector staff under Towards 2016, although it does not include a provision to make pay awards based on the findings of the Benchmarking body which is due to report to the Minister in December.

He said that because public sector pay was such an important driver of spending, managers were going to be obliged to keep staff levels at current levels by reallocating staff where necessary.

However, there are exceptions and around 9,200 public servants will be recruited, mainly in education, health and for An Garda.

Meeting service demands from demographic changes will account a further third of the 4.8 per cent rise in day-to-day spending. Among the measures included in this programme is the hiring of an extra 1,100 primary school teachers to meet the anticipated growth of 14,500 in the number of primary school students.

"Fifty one billion euro is a great deal of money and it is important that both the Government and the Houses of the Oireachtas look at what we are getting for this money, whether we are spending it on the right priorities and the value we are achieving for this money," Mr Cowen said.

"Not every problem can be cured by spending more money. Priorities change and we must change our responses accordingly."

The Pre-Budget briefing also provides economic and fiscal projections for the period 2007 to 2010 and anticipates a fall in GDP growth to 3.25 per cent next year before averaging at 3.5 per cent over the period 2008 to 2010.

"The lower growth . . . will have implications for us all. But we mustn't lose sight of the fact that this performance is nevertheless impressive by international standards and one that many of our European partners would love to replicate," he said.

Fine Gael said today's forecast showed the Government's "debt-fuelled property boom" had come to an end.

Finance spokesman Richard Bruton said: "It is now entirely clear that Fianna Fáil's promises made before the last General Election are only a pipe dream..the €2 billion needed to pay for them in 2008 is not there."

The Labour Party's Joan Burton said the slowing economy would test Fianna Fáil's priorities and the Government's ability to make hard decisions.