A fortnight ago in this column I addressed the economic policy challenge facing the Government. If we fail, by budgetary means or otherwise, to curb inflationary pressures, we must expect that as labour costs rise jobs growth will slow prematurely, and the recent rapid decline in unemployment will taper off.
Indeed, if we do not handle these problems well in the next 18 months, our long-term growth rate in the first decade of the next century could be prejudiced.
As an incentive to wise handling of these difficulties, we should look ahead to the kind of longer-term prospects that will be available to us if we resolve these short-term problems. The material for such a longer-term projection is available in the form of the Economic and Social Research Institute's medium-term projections for the economy published 15 months ago.
In the brief period since these projections were published, the performance of the economy and of the Government's finances have significantly out-run the ESRI estimates. It looks as if GNP for the current year will exceed by £1.5 billion the ESRI's projected figure, and tax buoyancy will probably boost public authorities' 1998 current revenue to a figure £2.4 billion above the ESRI estimate for this year.
Yes, public spending has also exceeded the ESRI's projected figure for this year, but this spending excess is a lot smaller - perhaps around £1 billion. Thus, the 1998 current account surplus is likely to be about £1.5 billion greater than foreseen by the ESRI in April last year.
Capital receipts look like falling short of the ESRI estimate by almost £200 million and capital spending may exceed the Institute's projection by a similar amount. But even allowing for the additional current surplus thus required to fund the capital budget, the overall out-turn of the combined budgets of central government and local authorities this year is likely to be at least £1.1 billion better than the ESRI foresaw - yielding an overall surplus of perhaps £900 million instead of the overall deficit of £200 million which the institute projected for this year.
It is thus quite clear that the 1998 base upon which to assess our prospects for the next dozen years is significantly more favourable than the institute foresaw 15 months ago.
Moreover, early indications of next year's prospects suggest that, despite the impact on Europe of the Asian crisis, the Republic's economy is likely once again to grow somewhat more strongly next year than the ESRI medium-term projection suggested. As for the institute's growth figures beyond that point, its projections for the first decade of the next century have always seemed to be somewhat on the conservative side.
But even on the basis of the institute's conservative projections, if we successfully extricate ourselves from present difficulties, then at present rates of personal income tax and social insurance, the resources available to the public authorities in the year 2010 would be around £33 billion - higher by two-thirds than the amount the authorities will have had from these sources this year.
On public spending, the ESRI made certain basic assumptions:
Social welfare payments increased in line with wages rather than prices.
Public Service pay rises post-1999 at the same rate as in the private sector.
The numbers employed in health and education increased by 2.5 per cent a year:
Other Public Service employment increased by 2 per cent a year and other public spending rising somewhat faster.
Overall, the volume of current spending exclusive of national debt interest rising by 3.7 per cent a year.
When combined with an overall inflation rate of 2.45 per cent, these assumptions imply an average annual increase of 6.2 per cent in such spending in current money terms.
But within this global increase the ESRI's estimates for future expansion of public employment appear high, for during the four years to 1997, Public Service employment rose by only 1.1 per cent annually - less than half the rate projected by the institute.
If this recent lower-than-projected rate of Public Service growth were to be maintained, and if the future growth of Public Service pay were in fact to be held to the same rate of increase as in the private sector, enough resources to make further serious inroads into our problems of poverty and disadvantage could be released while keeping the overall growth of public spending to the rate suggested by the ESRI.
However that may be, on the basis of these ESRI public spending growth projections, we would be left with a potential current budget surplus of £7.5 billion in the year 2010. This could be applied in three ways: to reduce personal taxes. to increase public investment. or to run an overall budget surplus and thus reduce national debt.
It is wise in the present period of exceptional growth to aim at running an overall budget surplus of significant size and to apply this to debt-reduction. But when the present period of exceptional growth ends and we move into the period of more modest 5 per cent per annum long-term growth projected by the ESRI, the running of a budget and debt-reduction surplus should then take second place to the development of an adequate infrastructure as a basis for future growth in the second and later decades of the 21st century.
For, quite simply, at the present stage of economic development, with infrastructure lagging far behind the rise in living standards, the reduction of the national debt should not be made a policy priority. For, even if we repay none of this debt between now and the year 2010, the growth of GNP will by that year have cut the debt/GNP ratio to less than 30 per cent. (Since 1987 this rate has already been reduced from just under 120 per cent to about 56 per cent in the current year).
And by that time interest payments on an unreduced national debt would be absorbing a negligible 3-4 per cent of public authorities' revenue - as against the 2123 per cent that had to be applied to this purpose for some years following gross economic mismanagement in the late 1970s.
On the basis of keeping our overall finances in balance rather than in surplus under normal economic conditions, and on the basis of the spending assumptions set out earlier, the remaining question is how the estimated £7.5 billion surplus should be allocated between personal tax cuts and public investment.
The ESRI projections suggested a cut of one-sixth in personal taxation, at a cost of just over £2.65 billion in 1998 money terms. But because personal taxation this year looks like absorbing a somewhat higher share of GNP than the institute foresaw, there could be a case for increasing provision for this to almost £3 billion to try to achieve a cut of one-fifth from the present level of personal taxation, including social insurance contributions.
This would bring the rate of personal taxation as a proportion of GNP down below that of any other European country today - including Britain, to which many on the right of Irish politics look for example in this matter.
Such a tax reduction policy would still leave a current surplus of £4.65 billion in 1998 money terms which, when added to capital receipts, would be sufficient to fund an increase in public investment to 2 1/2 times its level now.
Thus we can reasonably look forward to a scenario in which, within a dozen years, personal taxes would be cut to a lower level than elsewhere in Europe today, and it would be possible to increase the volume of public spending by an average of 3.7 per cent a year to improve services and tackle poverty. It would also increase by 150 the annual volume of public investment - and all this to be achieved without borrowing.
Of course, many other combinations of resource-utilisation are possible, and it will be for the governments during the next dozen years to decide the detailed deployment of these increased resources. It is, indeed, around such issues that serious politics will largely to centred over the next decade or so.
But at this moment of temporary difficulty in our affairs it is, I believe, important that public opinion be made aware of the kind of prospect we can look forward to if we avoid making a mess of things during the course of the next year or 18 months.
What should at any rate to be clear from this analysis is that in Irish circumstances it makes no sense whatever for right-wing elements, either in or outside politics, to continue to demand that the growth of current public spending be limited to a couple of percentage points annually with a view to cutting taxation.
For even with annual spending increases of over 6 per cent in current money terms, as well as a huge increase in public investment, enough resources are likely to become available to cut personal tax rates to well below the present British level - to a level lower, indeed, than that of any other European country today. To attempt to push our tax rates below such a level at the cost of failing either to modernise our infrastructure or to raise a large minority of our people from poverty would, quite simply, be an insane agenda.
Of course, because of the danger of inflation arising from a possible overheating of the economy, we need a prudent budget next December to damp down inflation.