Annual budgets effect changes in the pattern of revenue raising and spending. In any single budget the individual changes made are often quite marginal - adding a few percentage points to the previous year's spending under various headings or, perhaps, reducing a tax rate by a point or two - as this Budget has done with our higher income tax rate, writes Garret FitzGerald
But because we are all naturally interested even in quite small improvements - or, more rarely nowadays, disimprovements - in our personal purchasing power, these essentially marginal changes always attract a lot of publicity.
In last Thursday's Irish TimesI looked at once for comments on how this Budget would be likely to affect our economy next year. I found that just over 1 per cent of almost 3,000 column inches of space was devoted to what seems to me to be the really important issue of the economic impact of the Budget. There were two brief contributions on behalf of the ESRI and Ibec.
So, let me now add, through this column, a little more to the Irish Timescoverage of the Budget for 2007.
Budgets affect the economy by the way in which they either boost or reduce our economic growth rate. With an economy like ours, in which during the current year there was an actual Budget surplus, the likely impact of this Budget on the economy next year can be roughly measured by whether it is likely to increase or reduce that Budget surplus during the year ahead.
Budget fine-tuning of the economy is necessarily a somewhat imprecise art, because it is often difficult to judge just how much revenue will actually be yielded by taxes in the year ahead - and it is also sometimes difficult to forecast public spending 12 months ahead. Thus, this time last year the Minister and his advisers believed that their budget for 2006 would incur a slight deficit, but because both economic growth and the yield of taxation per unit of growth turned out to be higher than had been foreseen, and spending during the past 11 months has been fractionally lower than predicted, we are ending up with an unexpected 2006 budget surplus.
Now it is, I suppose, humanly understandable that, given such an unforeseen favourable starting point for an election year Budget, the Minister felt that he could afford to spend more freely. After all - he could tell himself - even if I use up half of this year's surplus during the months ahead, I should still be left with a Budget out-turn for 2007 some 2 per cent better than the figure that, when preparing last year's budget, I had expected to emerge in 2007.
But that is not the whole picture. For, given the high rate of growth in 2006, there is a danger that our economy might overheat next year, leading to inflation. That is why, despite the unexpected size of our Budget surplus this year, the ESRI has favoured actually boosting this surplus slightly, by keeping the growth of spending in 2007 a little below the likely rise in revenue.
By ignoring this advice, the Minister is risking worsening even further the already greatly weakened competitiveness of our exports of goods, and perhaps also of services including tourism.
The serious damage that was done to our competitiveness by Charlie McCreevy's budgets around the turn of the millennium has never been sufficiently grasped by our public opinion - including the opinion of what is still an economically somewhat unsophisticated business community, the members of which were far too easily seduced by the McCreevy personal tax cuts.
There is, it is true, some awareness in the business community and even among public opinion generally, that our rate of inflation in the years from 1997 to 2002 was disturbingly high - and that during these years the cost of living here rose by comparison with our European neighbours and the United States. But neither business opinion nor wider public opinion has ever grasped the full scale of the deterioration in our competitiveness that occurred in the years around the turn of the millennium.
Nor have most people made the connection between that deterioration and the huge boost to public spending that took place in budgets such as those of 2000 and 2001 - at the precise moment when we were both reaching full employment and also about to enter the single currency.
I've been looking at OECD tables which show changes between 1997 and 2002 in the relative purchasing power of our currency and those of the principal states with which we trade. Vis-à-vis Germany, France and the UK, the purchasing power of our currency is shown in the OECD data as having during these years declined by between 21 per cent and 28 per cent. Vis-à-vis the US the deterioration was somewhat less, at 16 per cent. Overall, our competitiveness in the markets to which we export declined by more than 20 per cent during those five years.
The post-2002 impact of this deterioration upon our export of goods was dramatic. Between 1990 and 2000 the volume of Irish exports had quadrupled, rising at a phenomenal rate of 16 per cent per year. By contrast, in the four years since our competitiveness was undermined by largely government-induced inflation, our exports of goods have almost totally stagnated - increasing by only 2 per cent a year. Our share of world exports, which had doubled during the 1990s, has since 2002 been in decline.
It is this unhappy record of greatly reduced competitiveness contributing to a rapidly-rising external payments deficit, that has made it desirable that we now take special care with our budgetary policy. And the fact that this Budget carries some risk of creating renewed inflation and weakening further our already badly damaged capacity to compete in world markets is what worries serious economists.
This Budget may come to be seen as having been a one-off, pre-election Budget exercise rather than the start of a second Government-launched bout of declining competitiveness. But it seems to me important that public opinion, at present mesmerised by the "gifts" showered on it last Wednesday by the Minister for Finance, should be aware of this possible budgetary downside.