The Exchequer returns for last year show that the economy continues to grow strongly. Tax revenues rose by 10.5 per cent last year, leaving the public finances in their healthiest state for years. The surplus announced on the current budget was £292 million and the underlying performance was even stronger, given that some capital spending was transferred to the current account. After borrowing for capital purposes is added in total Exchequer borrowing was £437 million, almost £300 million below the Budget day target.
Much of the reason for this strong performance; can be traced back to a rise in the number of people at work. The Department of Finance estimates that there was an increase of some 50,000 in total employment last year, a remarkably strong performance. This gave a strong boost to income tax revenue and, no doubt, also boosted a range of other tax headings.
The Minister for Finance, Mr Quinn, will be pleased with the figures. The level of borrowing is well within the limitations of the Maastricht Treaty and the outlook is good for 1997. Overspending in some Departments was more than compensated for by the buoyancy of tax receipts. And the level of national debt last year fell for the first time since the late 1950s.
Many of the problems faced by the Government in economic management are the result of the recent strong performance of the economy. Mr Quinn must ensure that his Budget does not give too strong a boost to an already strong economy. Meanwhile the Government and the Central Bank may be concerned that inflation could pick up over the course of the year.
Mr Quinn's first task is to draw up the Budget, which he will present on January 22nd. Sizeable tax reductions have been promised as part of the new Partnership 2000 agreement, although the Governments still has to decide how to structure the package.
But the real danger lies on the expenditure side. A cap announced by Mr Quinn last month for spending this year has been abandoned, partly because of higher public pay costs resulting from the new agreement. It is of the utmost importance that the strong figures for last year do not encourage other Ministers to seek yet higher spending allocations for 1997. The planned increase in spending this year, at three times the expected rate of inflation, is already too high, without adding yet more to the total.
The collect policy choice in relation to spending is clear. Ministers seeking allocations above and beyond those already agreed should just be told "No." But the Government and the Central Bank face some trickier choices on monetary policy. Increasing interest rates is the normal course to combat inflationary pressures. However it is far from clear that a small increase in rates would help to dampen the growth of borrowing, while a larger rise in borrowing costs could lead to undue strength in the value of the pound in the ERM.
For the moment, the Central Bank may decide to sit tight and see if the borrowing figures continue to show excessive growth. The Bank will also, of course, be watching the Budget and hoping that the Government does not add to inflationary pressures by agreeing too expansionary a package. Here, control of spending will be crucial and Ministers should remember that excessive rises in expenditure will lead inevitably to higher interest rates.