THE LATEST set of exchequer returns hold out the prospect that the rot in the Government finances has been stopped. Tax revenues are broadly in line with the Government’s revised projections, some areas of taxation have come in ahead of forecast and others remain worryingly weak, but overall the position is no worse than had been expected.
The Government was quick yesterday to claim some credit, but it will become clearer in the coming months whether the drastic measures implemented in the April emergency Budget have truly been effective in stabilising the exchequer. There is some grounds for optimism at this stage in this regard.
The exchequer returns along with other economic data published this week are open to the interpretation that the worst of the economic slump may have passed. Unemployment continues to rise and manufacturing activity declines, but not at the same rates seen earlier this year. The international picture is also improving.
However, any talk of a recovery here must be tempered by the other strong message coming through from the exchequer returns: that is that the exchequer deficit, which is financed by borrowing, is currently close to €15 billion. Some €6 billion of this relates specifically to the costs incurred by the State in supporting Bank of Ireland, Allied Irish Bank and Anglo Irish Bank.
Stabilising the banks and the exchequer were the immediate twin priorities of the April Budget but addressing this deficit and the similar deficits predicted for the next few years is the real challenge. This can only be done through cutting expenditure and reforming the public sector as further general increases in taxation are likely to be counter-productive.
Yesterday’s other piece of economic news, the downgrading by Moody’s of their sovereign debt rating for Ireland, serves as a reminder that very serious doubts exist, both here and abroad about the Government’s ability and determination to push through the level of spending cuts required to bring the exchequer deficit back within the EU limits.
Moody’s, in their analysis, give the Government credit for the decisiveness of the policy response to date, but go on to warn that unless competitiveness can be restored – and absent a global economic recovery – we risk being swamped by the debts we are currently incurring in order to balance the books. There is a very real prospect, they warn, that if we fail to rein in the cost of running the State we risk a return to the vicious circle of the 1980s, when rising debt costs took an increasing share of tax revenues and led to further borrowing.
Moody’s downgrading is a timely reminder that the real task of fixing the economy is only just beginning and the tough choices that are before the Government in the report of the Expenditure Review Committee and soon to be completed report of the Commission on Taxation cannot be shirked.
Yesterday’s exchequer returns represent a step in the right direction but they are no basis for complacency. They merely indicate that bad news may be good news.