Today's Exchequer returns for the third quarter of the year are expected to confirm the strong trend in the public finances. Tax revenues have benefited from the economic recovery and are running well ahead of target and it now seems certain that borrowing for the year will be well below what was forecast in the Budget.
At mid-year, the Department of Finance predicted that borrowing could come in €1 billion below the €2.8 billion Budget target, but even this is now looking pessimistic. The Irish public finances position remains one of the healthiest in Europe, at a time when many other countries are struggling - and in some cases repeatedly failing - to stay within the Maastricht borrowing guidelines.
It is a comfortable backdrop for the new Minister for Finance, Mr Cowen, as he starts the work of framing his first Budget. Provided growth remains strong, then the tax buoyancy evident so far this year should carry through to 2005. Meanwhile, spending now appears to be under tight control. This means that the outlook for the Budget is the most favourable faced by the current Government, which was forced to cut back after the last election due to an unsustainable spending spree unwisely entered into at the peak of the economic boom.
This does not mean that it will be an easy Budget to frame, however. Expectations are already building about the scope for tax reductions and higher spending. The new Minister, judging by his comments to date, well understands that many of these expectations are unrealistic. If the Government is to stick to the policy approach outlined in its programme and in the national agreement, Sustaining Progress, then there will be scope for a reasonably generous Budget, but not for a major giveaway.
Mr Cowen and his colleagues must resist any temptation to accelerate the growth in spending levels. An increase of 7-8 per cent in current spending would be ahead of inflation and should be ample to improve the level of services to the public. As Mr Cowen himself has pointed out, in many cases better services in areas like health will be driven by reform programmes, rather than by further massive cash injections.
There are clear reasons why this prudent approach must be adhered to. The first is that at a time of strong economic growth, it is essential that some leeway be left in the public finances for when the economy softens. The pre-election spending spree in 2000-2002 left the public finances exposed when growth slowed. It was also wasteful, as it did not deliver improvements in services commensurate with the extra money spent. Pushing up spending too rapidly at a time of strong growth could also fuel inflation. Mr Cowen does not need to engage in a round of cutbacks, but he does need to be careful.
If Budget 2005 is a good one, it will disappoint some of the Government backbenchers and the many lobby groups looking for a looser approach. However, it is not a time for a big package of Budget giveaways. A rather boring Budget might be no bad thing.