Level of growth in economy exceeds forecast

Exchequer figures for the first half of the year, due out today, are expected to confirm that the Government finances are far healthier than expected. Una McCaffrey reports.

Figures published by the Central Statistics Office (CSO) yesterday estimate that the economy grew faster in the first three months of this year than at any point since the start of 2001, when the Celtic Tiger was close to its peak.

This level of growth, which has exceeded almost all expectations, suggests that the State will gain much more in income from taxes and other sources this year than it expected when framing the most recent Budget. The strength of tax revenues will be apparent when the Exchequer returns for the first six months are published this afternoon.

The figures released yesterday show that growth in gross national product (GNP) rose to 5.1 per cent in the three months to the end of March. This compared to a GNP decline of 2.7 per cent in the same months of 2003.

Gross domestic product (GDP), which includes the profits of multinationals operating in the Republic, was almost twice as high than a year earlier at 6.1 per cent.

The better-than-expected performance of the economy means the Minister for Finance, Mr McCreevy, will borrow substantially less than predicted on Budget day.

The State should be able to shave at least two-thirds off its borrowing requirement for this year.

The Bank of Ireland's chief economist, Dr Dan McLaughlin, said there was now solid evidence of the return of the Celtic Tiger.

Mr Colin Hunt, chief economist with Goodbody Stockbrokers, was similarly upbeat, remarking that the economy is now well placed to achieve healthy growth levels for several years to come. This outlook was supported by revised economic estimates released by the Central Statistics Office for 2003.

The new numbers suggest that GDP grew by 3.7 per cent last year, more than double earlier estimates.

The increase was driven in the main by higher exports and investment spending, suggesting that business confidence was high at the end of the year and into 2004.

GNP growth for 2003 was revised down slightly from 3.3 per cent to 2.8 per cent, thus narrowing the gap between the two economic measures and indicating that the recovery was more broad-based than may have initially been thought.

"Clearly the Celtic Tiger never died, and the recent figures point to a reinvigoration from the last quarter of 2003," Dr McLaughlin said.

He said that the consequent boost to the Exchequer would be as high as €2 billion this year.

"Mr McCreevy could do a lot if he wanted to," he said of the Minister for Finance's new room to manoeuvre on the State's finances.

The Economic and Social Research Institute (ESRI) advised earlier this week that the Government could comfortably afford to allocate €500 million to alleviating taxpayers' burdens in the forthcoming Budget.

The Exchequer has already been boosted this year by the €650 million windfall drawn in by the Revenue Commissioners from offshore account-holders, with half-yearly Exchequer returns to be published today expected to show strength in other areas of tax income, too.

Last December Mr McCreevy said he would borrow around €2.8 billion in 2004 to fund the Exchequer's spending requirements.

Economists were predicting yesterday that this Exchequer borrowing bill could be as low as €700 million.

The general Government balance, which offers a broader measure of the Government's entire financial picture, is now expected to be in surplus at the end of the year. This compares to a deficit of €1.6 billion forecast by the Department of Finance last December.

Both this and the Exchequer deficit forecasts were based on the economic data available to the Department at the time, with the new revisions naturally changing expectations.