In its pre-budget report last autumn the Central Bank stressed the greater role that fiscal policy had assumed with the advent of EMU, adding that "it is essential that Ireland's fiscal policy be geared to sustainable growth without the risk of overheating".
And in its pre-budget quarterly commentary the ESRI said that "the forthcoming budget should be prudent . . . but within that constraint care should be taken to be seen to fully honour the tax-reduction commitments of Partnership 2000 . . . There is a strong economic, rather than political, case for tax cuts to be designed to reduce the very high marginal tax/benefit levels at low-income levels rather than the less excessive marginal tax rates on high incomes". And it went on to recommend concentration on increasing personal allowances.
In this column on October 25th I wrote: "With a growth rate that may now exceed 8 per cent, with house prices rising astronomically, and with the prospect of an imminent further boost to demand arising from a rapid and substantial drop in interest rates, one would not need to be a professional economist to know that what is needed now is a budget that would restrain rather than boost the growth of our economy."
I accepted that the Minister would probably have to concede some £350-400 million of tax reliefs, "concentrated on the lower-paid, particularly through increases in personal allowances".
I added that "any attempt to pursue the electoral support of the better-off by cutting the top tax rate could have very negative repercussions on the Partnership 2000 Agreement, upon which our capacity to achieve non-inflationary growth depends". Finally, I noted that Charlie McCreevy had been trying to hold current spending increases other than national debt interest to 4 per cent.
The key point about Partnership 2000 was that the unions were known to believe that in the negotiations for this agreement, they had an understanding that some £700 million of the three-year £900 million personal tax reductions would take the form of increases in personal allowances and widening of the standard rate band. And, as the 1997 budget introduced by Ruairi Quinn had given the unions only £200 million of the £700 million they believed they were promised under these two headings, at the time when Charlie McCreery presented his budget last December there remained £500 million of these tax changes to be delivered in the 1998 and 1999 Budgets.
How did he react to this scenario combining excessive growth with outstanding tax commitments needing to be fulfilled to maintain pay moderation?
First of all he gave a huge stimulus to an economy that was already growing at a disturbingly rapid rate. The full-year net cost of the Budget changes was over £930 million, of which almost £590 million took the form of tax reductions, and £345 million comprised announcements of further expenditure, which raised the total of supply service spending exclusive of debt interest by £625 million or 6 per cent.
(Of this figure £225 million was accounted for by social welfare increases and in fairness it should be said that almost half of this was needed simply to offset increases in prices and did not represent an increase in real terms.)
Second, of the £590 million full-year tax cuts over half - £315 million - was accounted for by reductions in the rates of income tax. And only £140 million - less than one-quarter - was applied to increasing personal allowances or to widening the standard rate band, leaving a further £360 million to be found in the 1999 budget to complete this process.
Now, in fairness it has to be said that the reduction of the lower tax rate from 27 to 24 per cent in the 1997 and 1998 budgets has, of course, benefited people at the lower end of the pay scale as well those higher up. It can, indeed, be argued that this has compensated for the lag in raising the personal allowances and in the process of widening the lower tax band, and that the changes in the 1997 and 1998 budgets have already met the commitment in Partnership 2000 to increase by 14 per cent the take-home pay of a worker on the average industrial wage in receipt of a 9.25 per cent pay increase.
To that the unions may well respond that, especially with GNP growth over the 1996-99 period running at a rate that looks like being almost 50 per cent above that projected in Partnership 2000 document, they cannot accept smaller adjustments to personal allowances and a lesser widening of the lower tax band than they believe to have been part of their understanding of how the agreement would be implemented.
But, to return to the economic impact of the 1998 budget, it would be hard to imagine a more inappropriate, indeed dangerous, budget for a country where GNP had been growing during the previous 12 months at a rate of 7.7 per cent; where inflationary pressures had already created a property boom; and where it was known interest rates would have to fall by 2-3 per cent by the end of the 1998 budgetary year.
For the budget further stimulated this already abnormally high growth rate to the danger point where some economists are now forecasting an 11 per cent increase in GNP this year, although I myself believe that the out-turn will be somewhat lower than that. As to the tax changes, as the Government now clearly realises it was unwise for their parties to have promised the electorate reductions in both tax rates to please better-off voters, at a time when they knew these could be implemented only at the cost either of failing to deliver on Partnership 2000, or of risking overheating the economy by delivering on both their promises and also on Partnership 2000.
And, on the expenditure side, while in general I have been sceptical about what sometimes seems to be excessive emphasis on curbing current spending, in the particular circumstances of a 1998 budget offering almost £600 million of tax cuts in a period of inflationary pressures, it was equally unwise of the Government to increase current spending by a further £625 million, or 6 per cent.
There is a curious paradox about the situation that has thus been created - or at least greatly aggravated, by the 1998 budget - and it is one that it is difficult to get the man or woman in the street to accept. This is the fact that we are now constrained by the excessively rapid growth of the economy to limit both tax cuts and spending increases - whereas if our growth was slower, and we were free from the threat of inflation, there would be room both for bigger tax cuts and for bigger spending increases.
We are extraordinarily fortunate in the fact that our economy is the only one in Europe that can safely expand at a rate of 6-7 per cent a year. If we could hold growth down to that level for the next couple of years and then bring it down to 5-6 per cent early in the next decade, this would permit taxes to be significantly lowered and public services to be substantially improved over a fairly prolonged period.
Unfortunately, because of a deplorable lack of budgetary control, we seem now to have worked ourselves into a situation where, for a time at least, we will be prevented from securing these benefits of economic growth without risking a dangerous level of inflation.
I am afraid that Charlie McCreevy's insistence not merely on reducing the higher as well as the lower rate of tax but also on pursuing hares of his own - such as the halving of Capital Gains Tax, for which there had been no public demand - has left him facing an almost insoluble problem in the 1999 budget. That problem is: how to provide the further £350 million in income-tax cuts needed to meet union expectations, while avoiding any net reduction in taxation - which would be quite inappropriate at this stage.
I do not envy him in the absurd, and dangerous, situation in which he now finds himself. But he is where is today because of the serious mistakes he made last December. And if, as a result, our highly successful economy gets into difficulties, neither he nor the Government to which he belongs will be easily forgiven by the electorate. For, while governments may sometimes be forgiven for not coping adequately with a failure that is not their fault, they are not so easily forgiven for converting success into failure.