Senior Government Ministers are playing down the room for manoeuvre in the forthcoming Budget. These warnings are timely. Economic growth is slowing quite sharply, which inevitably affects tax revenues. While the outlook for next year remains uncertain, it is likely that the Government will have considerably less room for budgetary largesse than it would have expected even a few months ago.
The main reason for the tightening budgetary arithmetic is slower economic growth. The Department of Finance, in its annual review and outlook published this week, has reduced its forecast Gross National Product growth rate for this year from 7.4 per cent to 6 per cent. There may be a further slowdown next year. It is important to realise that growth of 5 per cent plus would still be very healthy. However it does represent a considerable slowdown from the growth rates of recent years.
In this light, the current trends in the public finances are unsustainable. Day-to-day spending is set to rise by some 20 per cent this year. Meanwhile tax revenues are currently running 5.6 per cent ahead of last year, compared to a budget forecast of 12.5 per cent for the full year. Over the past couple of budgets the Government has been able to afford generous tax relief, while abandoning its earlier targets for public spending control. As it frames the 2002 Budget, it must ensure that it keeps the public finances on a healthy course.
Precisely what scope Mr McCreevy will have will not be clear for some months. Much will depend on the international economic outlook. Recovery in the US would also lift growth here, but despite another interest rate cut from the Federal Reserve Board last night, the prospects for the US economy remain uncertain. It is possible that the £500 million shortfall predicted by the Department this week in its Budget tax forecasts could widen further in the months ahead.
As discussions start on the Budget, the priorities should be clear: tax relief should be aimed at low to middle-income earners; there must be a real effort to improve the quality of key public services; measures to help the less well-off and the disadvantaged must be accelerated; and we must continue to address the key infrastructural blockages affecting the economy. As the Budgetary sums tighten, it will not be easy to meet all these objectives. The Government is already signalling that it recognises the importance that the public now places on improving key services. It faces two difficulties in addressing this. The first is that it will have less money available. The second is that more money alone will not solve the deficiencies in key areas such as healthcare.