FINANCE: Government accounts published on Wednesday illustrate the biggest problems facing Charlie McCreevy. Assumptions he and his officials made about revenue and expenditure when they framed the 2002 Budget last December have turned out to be more than a little over-optimistic, writes John McManus.
As a consequence, his carefully crafted figures look like being busted and the deficit he sought to avoid is fast becoming an inevitability.
Tax revenues for the year to the end of May are down around 1 per cent on the same period last year. The budget forecast was for growth of 8.6 per cent for the year, and to achieve this would require a rebound in the remainder of the year that is all but out of the question.
The real problem is income tax receipts. The Government has estimated that these would rise by a modest 1.1 per cent, while it is in fact down by an embarrassing 14.7 per cent, and nobody seems to know why. Only the fact that revenues from VAT and excise duties are well ahead has saved the Exchequer from an even more alarming shortfall in revenues.
The Government's day-to-day spending in the five months to the end of May is running 22 per cent ahead of last year. What is particularly alarming is that the figure is growing rather than falling, and once again the Government's target for the year of around 14 per cent looks fanciful.
Reining in expenditure will have to be the Minister's first priority. He is unlikely to bring in a mini-budget with new spending targets, as the civil service machinery is already in the first stage of the process of producing the 2003 budget.
There will be cutbacks this year, but the Exchequer is almost certain to end the year in deficit. The shortfalls in revenue and overruns on the spending side will wipe out the small surplus of €170 million predicted last December.
As a consequence, the Government may have to return to borrowing a year earlier than it anticipated.
This will be something of a setback for Mr McCreevy, who has made no secret of his antipathy to deficit finance; hence the use of a number of once-off measures to try and balance the current budget.
A return to borrowing over the life of the next Government and the pros and cons of the issue where well thrashed out during the election campaign. There was a consensus across the parties and among economic commentators generally that limited borrowing is reasonable provided the money is wisely spent.
In the context of the Irish economy, this means investing it in physical assets such as roads and schools which will in time return an economic dividend. The best-known example is the investment in education which produced the workforce that has made Ireland an attractive location for foreign investment.
Problems arise when borrowed money is used to meet day-to-day bills. This was the course followed so disastrously in the early 1980s that brought the economy to its knees. But the trouble is that there is a very big grey area between what constitutes day-to-day spending and what is investment.
Every Government Department and State agency has schemes which are very often little more than cash handouts dressed up as investment.
Perhaps the biggest challenge facing the Government over the next five years is ensuring that borrowed money does not end up being "invested" is these schemes.
On the basis that there is little Mr McCreevy can do to salvage the budgetary position this year, his next objective will be getting his Cabinet colleagues to agree substantial reductions is their Departments' budgets next year.
As regards the rest of 2002, the Minister can only make cuts where he can and hope that the shortfall in revenue is due to some mysterious technical issues that will unwind during the rest of the year.