Inflation: The Government's commitment means McCreevy is unlikely to raise VAT and excise, writes Cliff Taylor, Economics Editor.rates significantlyInflation
The Government has committed itself to "fully take into account" the target of reducing the rate of inflation to the EU average when framing the Budget. The commitment, made in a not-yet-published action plan on inflation agreed as part of the new national programme, would appear to limit the likely extent of indirect tax increases on Budget day.
An anti-inflation group, comprising representatives of the social partners who have signed up to Sustaining Progress, have agreed the action programme, due to be published shortly. It says that inflation should be brought down to the EU average, currently 2 per cent.
While this week's consumer price index figure showed an annual inflation rate of 2.3 per cent, the proper measure for comparing our rate with elsewhere in Europe is the EU harmonised rate, currently running at 3.3 per cent.
The main reason for the difference is that mortgage costs, which have fallen over the past year, are not counted in the EU measure.
As there is still a significant gap between inflation here and in the rest of the EU, the Government commitment as part of the new programme looks set to limit increases in excise and VAT on Budget day. The 2003 Budget contained significant rises, which added almost 1 per cent to the inflation rate.
While some increases are likely this year, it would be difficult for the Minister for Finance, Mr McCreevy, to add more than half a point to next year's inflation rate without being seen to breach completely the commitment in the new plan.
The text promises that budgetary policy would have to be seen to have regard for the inflation target.
Economic forecasters believe Mr McCreevy will have to raise some extra revenue on Budget day, but not a very large amount. It is unclear how far he will allow borrowing to rise, but the general government deficit (GGD) - the EU borrowing measure - is likely to be kept under 1.5 per cent of Gross Domestic Product, well below the 3 per cent maximum set under the stability and growth pact.
In a note issued yesterday, AIB Group Treasury forecast that Mr McCreevy will target a GGD of somewhere under €2 billion, equating to 1.3-1.4 per cent of GDP. This would keep borrowing well below the forecast 2.7 per cent of GDP average in the euro zone.
The main criticism of the Estimates from economists and business groups centred on the amount of money allocated for capital investment.
IBEC has said that the allocation under this heading is "regrettable" given the Government's investment priorities.
The note from AIB Group Treasury points out that two years ago, in its medium-term budgetary outlook, the Government forecast that Exchequer-financed voted capital spending would rise to €6,631 million in 2004.
The allocation in yesterday's Book of Estimates provides for a figure of €5,515 million, which is 17 per cent below this level.
To try to increase overall investment spending next year, the Government has pencilled in €150 million in public-private partnership funding for the roads programme.
An announcement is expected on accelerating the use of such partnership programmes on Budget day.