Sharp spending rise adds to pressure on State finances

Government spending is still running well above target, according to new figures, threatening a sizeable deficit in the exchequer finances for the year, despite planned cutbacks.

Meanwhile, a sharp rise in unemployment last month provided further evidence of a slowing economy.

The exchequer data, published by the Department of Finance, show that the Government spent 22 per cent more over the first seven months of the year than in the same period last year.

The figure is well ahead of the annual expenditure growth of 14.3 per cent targeted by the Minister for Finance, Mr McCreevy, on Budget day last December. Planned spending cutbacks are unlikely to bring the figures back on target, forecasters believe.

The July data also show that tax revenues, despite rising slightly on an annual basis, have been running well below Mr McCreevy's original goal of 14.3 per cent for the year.

Exchequer receipts last month were up 2.6 per cent on the same month last year, the first year-on-year growth seen in 2002. While welcoming the growth, economists described it as sluggish and attributed it largely to fortuitous timing of corporation tax returns.

Income tax - which contributes almost one-third of the Government's tax revenue - continued to decline in July, according to the data. Income tax for the first seven months was more than 11 per cent lower than in 2001, with new statistics on unemployment making a recovery in income tax revenues look unlikely in the near term.

Separate live register figures for July showed that the number of people claiming unemployment benefit had grown by 17 per cent over last year. More than 170,000 are registered as being out of work, which is 4.4 per cent of the labour force. This is the highest unemployment level since spring 2000 and has generated censure from the Opposition.

Fine Gael called on the Tánaiste, Ms Harney, to explain how she intended to address the unemployment issue, while Labour's spokesman on enterprise, trade and employment, Mr Tommy Broughan, accused the Government of being "in denial" about its economic problems.

In general, observers agreed that the latest economic information would make Mr McCreevy's professed target of a €170 million Exchequer surplus for the year difficult to meet, particularly in light of the costs likely to be attached to the benchmarking process.

Mr Colin Hunt, chief economist with Goodbody Stockbrokers, said the surplus goal was now "ambitious to the point of being unachievable".

"Twenty-two per cent growth in public expenditure is outrageous," said Mr Hunt, who argued that single-figure spending growth would be a more natural range.

"We should be seeing the headline rate coming down below 20 per cent in August," Mr Hunt said, welcoming Mr McCreevy's intention to save €300 million through spending cuts and additional charges. He added that the overall Exchequer numbers provided some comfort on taxation revenues but still suggested that "a lot more needs to be done".

Mr Austin Hughes, chief economist with IIB Bank, said that the Minister could be facing into a deficit of as much as €1.5 billion at the end of the year if trends revealed in the latest figures continued. The Economic and Social Research Institute has already forecast a €900 million deficit.

"Even if you do get spending down, the numbers are showing that there's a long-term problem," said Mr Hughes.

He pointed to Central Statistics Office figures released earlier this week which showed economic growth of just 2.9 per cent in the first quarter of this year, and said the economy was doing little more than "marking time".

IBEC economist Mr Aebhric McGibney said that the "major setback" to be addressed in the public finances was the reduction in income tax, which he believed was directly linked to wage demands.