Davy warns against 'irrational fear of minus sign'

Policymakers should not allow themselves to feel an irrational fear of deficit when drawing up this December's Budget, a leading economist has warned. In his latest briefing, Davy chief economist Mr Jim O'Leary has said "budgetary policy should not become impaled on an irrational fear of the minus sign", particularly at a time when the ratio of debt to GDP runs at "an uncommonly low level", second in the EU only to Luxembourg.

According to Mr O'Leary, the Republic's experience with deficit in the 1970s and 1980s has caused the idea of falling out of surplus to carry unduly harsh connotations. "The minus sign seems to fill us with dread," he said yesterday.

"In times of very rapid economic growth, it's entirely appropriate to run an economic surplus and in times of sluggish growth, there's no problem with running a deficit."

While there may be no economic problem with the idea of a deficit, however, Mr O'Leary acknowledged that perceptions in an election year were an entirely different story. A budgetary surplus has become a "totem" for the Republic's economic health in recent years, he said, adding that an acceptance of this idea was akin to treating economic policy as "something concerned almost exclusively with symbols".

The Davy briefing predicts that year-on-year growth for the final quarter of this year of close to zero, "barring an improbably sharp recovery", and follows this through with a 2002 GDP forecast going as low as 3.5 per cent, 2 per cent below previous estimates.

Such a figure would mean that the economy's potential was unfulfilled, according to the briefing, leading to a marked rise in unemployment. "In these circumstances, a big reduction in the Government's budget surplus should not be resisted," it says.

The extent to which the Minister for Finance, Mr McCreevy is open to tax cuts in the forthcoming budget will be governed by the Government's budgetary balance targets.

A lower surplus or a small deficit would accord the Minister more room for manoeuvre, Mr O'Leary said, cautioning that tax policy "should not be overwhelmingly governed by the desire to avoid a deficit". Rather, he said, taxes should be treated as a demand management tool.

He warned, however, that a deficit, if accepted, should not be treated as a licence to spend without limit. The current rate of public spending is unsustainable and should not be allowed to continue, he said.