This loss of spending control must be reversed

 

With the publication 10 days ago of the May exchequer returns it became clear that at the very time our politicians were competing with each other to promise more spending, and in some cases further tax cuts also, the erosion of our budgetary situation, which had been such a striking feature of our economy in 2001 and in the early months of the current year, was actually accelerating, writes Garret FitzGerald

During the first five months of the year such current spending rose twice as rapidly as was provided for in the overgenerous budget of last December, but in May spending accelerated further to a level more than 50 per cent above last year. That's a rate of increase 3½ times greater than the 14 per cent rise in spending that our already overgenerous budget had allowed for.

Hitherto both the minister and the Department of Finance have played down this overspending. During the election campaign the minister was content simply to deny that it was a problem. Astonishingly, he got away with this, simply because the Opposition parties preferred not to pursue the matter lest the reality of our budgetary difficulties cast a shadow over their spending promises, which had been foolishly based on the already completely out-of-date Budget projections.

For its part, at the end of March, when spending increases were already 50 per cent higher than the Budget had provided for, the Department issued a statement saying: "The rate of annual increase in spending is moderating, but this can vary from month to month. Spending plans by Departments are being monitored to ensure that these come in on target".

Possibly because of inhibitions about announcing cutbacks during an election campaign this departmental "monitoring" took the form of permitting spending to rise in April and May almost three times as fast as the Budget had proposed.

Because of the antiquated way in which our government finances are published, the Dáil and the public have no current information as to which of our former ministers have been responsible for this grossly irresponsible overspending.

However, when he made his recent ministerial appointments the Taoiseach must have known where the damage was being done, for in government 20 years ago I required the presentation of these departmental spending figures on a monthly basis. (Astonishingly, before then it was only at the end of each year that such information was belatedly made available to the government).

Although for the first couple of months of each year these cumulative departmental figures are of limited value, I found that by the time the cumulative figures to April were available, the areas where spending was in danger of moving out of line with projections were becoming clear. This enabled corrective measures to be taken in good time, and by 1986 both tax revenue and current spending were coming in within 1 per cent of the budgeted level, in sharp contrast to the current astonishing budgetary indiscipline.

I think it would be salutary for the Opposition to insist in future on the publication of these monthly departmental spending figures, so that when a government starts to lose control of public spending, as has happened so disturbingly under the recent government, the offending ministers may be held to account by the Dáil while there is still time to stop the rot.

This year's loss of control of public spending has most unhappily coincided with a continuing collapse in revenue from income tax. Last year revenue from this tax fell short of the minister's estimate by £800 million, and no official explanation was offered or insisted upon by the Opposition or sought by the media for this extraordinary miscalculation.

There have, however, been suggestions in the media that the economic model used by the Department of Finance in order to calculate tax revenue is inadequate for this purpose, and it has also been said that a shortage of qualified economists in that Department has been allowed to persist for some time without any action by the minister.

However that may be, the fact is that the minister underestimated substantially the effects of the tax cuts he made 18 months ago in his Budget for 2001. And what is very disturbing is that instead of identifying, and correcting, the causes of this major miscalculation of income-tax revenue last year, the minister simply went on to repeat this error in his Budget for the current year.

For, revenue from income tax, which had been budgeted to increase by about 4 per cent this year, was by the end of May running 15 per cent behind its 2001 level, reflecting an overall shortfall of almost one-fifth. Thus the cumulative miscalculation of income-tax revenue over the two years 2001 and 2002 could now turn out to have been in excess of one-quarter. That is a quite astonishing mistake to have made in our national budgeting, one that I do not think has any precedent elsewhere.

Is there a possibility that this revenue shortfall may remedy itself later in the year?

At the end of March the Department of Finance spoke of a "general expectation that the economy is on the road to recovery and that this should be reflected in tax revenue over the remainder of the year". There are, however, few signs yet of such a recovery: indeed in April industrial output fell back by 15 per cent from its high March level.

However, the Department also remarked in early April that budgetary measures in relation to VAT and corporate taxation "have yet to be reflected in extra tax revenue", and it is true that in April and May both of these taxes showed some buoyancy.

But this proved insufficient to offset the continuing shortfall in income tax, and overall tax revenue in those two months was barely 1 per cent above the previous year's level; whereas the Budget had forecast tax revenue to rise by 8.5 per cent over the course of the year.

There may well be some improvement in the revenue position during the remainder of the year, but it seems highly unlikely that it will rise during the months ahead by the 15 per cent that would be needed in order to bring the level of tax revenue for the year up to the figure that was budgeted for last December.

If one takes the optimistic view that now that the election is over the massive expenditure overruns will be halted at once by a contrite Charlie McCreevy, despite such additional demands as those deriving from benchmarking, and if at the same time tax revenue for the remainder of the year were to run at the rate predicted in the Budget, and if one also assumes that capital receipts and capital spending will turn out at the level that was budgeted for, the overall deficit (as we calculate our Budget figures for domestic purposes) might this year be held to about €2 billion, or 1.6 per cent of GDP, in contrast to the surplus announced by the minister in his Budget speech.

Those are, however, three somewhat heroic assumptions, demanding on the one hand a tougher approach to spending than we have seen for a very long time, and also a lot of luck on the revenue side.

Breda O'Brien is on leave