Budgeting For The Boom

 

There is no doubt that this week's Budget package will provide reductions for taxpayers and additional spending to tackle poverty and exclusion. Pre-Budget figures, published over the weekend, suggested that the Government has not as much room for manoeuvre as had been expected. But the addition of some cash from the expected sale of state assets may give the Government more room for manoeuvre. However the Minister for Finance, Mr McCreevy, will not be able to keep everyone happy, and the choices of what to include in the package are important ones.

The pre-Budget White Paper on Receipts and Expenditure shows that the Government faces a surplus of £223 million on the Exchequer finances in 1998 before any Budget-day measures. Many analysts had predicted a higher pre-Budget surplus, but the Government is budgeting to borrow significantly to fund increased capital investment spending. The Department of Finance also appears to have taken a conservative view in forecasting tax revenue next year.

The Minister, Mr McCreevy, should be able to afford a reasonably generous tax package and higher spending, while still aiming for an overall surplus on the Exchequer finances. However, the pre-Budget figures show that talk of £500 million tax give-aways will be wide of the mark, unless the Minister decides to throw caution to the wind, which would not be advisable.

So what should Mr McCreevy do? His first principle must be to maintain a prudent approach to the Exchequer finances. This is crucially important for a number of reasons. One is that in a little over a year's time we will be entering monetary union and it is essential that as we take this step, we do so with a strong Exchequer position.

The rules of monetary union will demand a low level of Exchequer borrowing. But an even more important reason for entering monetary union with a strong position on the Exchequer finances is that this will give the Government some scope in adjusting spending and taxation in response to any difficulties which hit the economy. Once inside monetary union we will be unable to adjust interest rates independently, so this scope for Budgetary manoeuvre becomes even more important.

Also, EU funding is set to run down after 1999. This will mean that the Exchequer will have to pick up some of the slack, if capital investment spending is to be maintained at its current level. The final argument for fiscal prudence is that we simply cannot rely on the current economic boom continuing in the long term. And when growth slows, the Exchequer finances will inevitably be hit through lower tax receipts and higher spending.

In the light of these arguments, there is a strong case for aiming for a surplus on the overall Exchequer finances next year. This will still leave room for higher spending in areas like social welfare and the health services. It will also mean that Mr McCreevy can afford tax reductions. In framing this package, it is important that the Government aim at addressing the key problems in the tax system, which mainly relate to the high tax charge on relatively low incomes. This means that the Budget should, as a priority, increase personal tax allowances substantially and widen the standard income tax band. Lower income tax rates would also be welcome, but this must not be the only mechanism used to benefit the PAYE sector in Wednesday's package.