McCreevy gets tough before Budget

Each year the Minister for Finance presents a two-part drama - the publication of the Estimates, followed shortly afterwards …

Each year the Minister for Finance presents a two-part drama - the publication of the Estimates, followed shortly afterwards by the Budget. This year all the drama was in Act One: the Estimates. Cliff Taylor, Economics editor, analyses the impact of the Estimates.

The Government has got all the bad news out of the way quickly in publishing its spending plans for 2003. After the cutbacks announced yesterday, next month's Budget will seem mild - even boring - by comparison.

The Minister for Finance should now be able to announce a fairly modest borrowing target for next year without any major increases in general taxation levels.

The 2 per cent increase in overall planned spending next year will be added to on Budget day by social welfare increases, some provision for public sector pay and perhaps some additional investment spending. Indirect taxes will be increased to help pay for this and some other modest tax measures may raise extra funds.

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However, the Minister should be able to aim to keep the overall level of Exchequer borrowing at a fairly modest 2 per cent of Gross National Product without any significant income tax rises. Some economists, such as those at the Economic and Social Research Institute, had advised that the Government borrow substantially more but Mr McCreevy appears to have ignored this view.

To keep borrowing and taxes down he cut spending in two ways.

First, in day-to-day spending, he held the increase in all areas except for pay to just 2.5 per cent, well below expected inflation of 4 per cent. This is why departments were announcing real cutbacks in service levels yesterday. The pay element of current spending continues to rise much faster, up 6 per cent with a further rise likely on Budget day.

Here the Department has not announced any "freeze" on recruitment, but it appears that the 2003 allocations will, if adhered to, mean no overall rise in numbers next year.

The second area of cutbacks was in capital spending. Here the Minister has really wielded the axe, cutting spending by 7 per cent. Given the rapid rise in the cost of actually completing major projects, the real impact of this reduction will be significant - the LUAS will be delayed, no new road projects will be started and many planned school buildings will be put on hold. Effectively, the targets set down in the National Development Programme have now been abandoned.