Exchequer returns too much of a good thing

LIFE is never easy as Minister for Finance. Mr Ruairi Quinn may be tempted to raise a toast to the strong Exchequer returns for last year. But he might secretly have preferred that things were not quite as good. For the headlines about the strongest Exchequer performance in 20 years will raise expectations among the public for Budget day, as well as leading his Cabinet colleagues to seek a few extra bob in their departmental kitties for 1997.

On the spending side, Mr Quinn's strategy of getting agreement on a cap for current spending next year when the estimates were agreed has not worked this year. An additional £24 million has to be added because of the public sector pay agreement included in the new Partnership 2000 and some more may go on to promote "social inclusion." But the key point is that with no spending cap in place it is open season for Mr Quinn's colleagues to come looking for extra cash.

The challenge for Mr Quinn is to fight them off. Already spending next year is set to rise by more than 6 per cent, a 4 per cent rate of increase in real terms, twice the limit set in the Programme for Government. The danger already is that spending will have to be cut back in the years ahead, as the Exchequer finances are benefiting at the moment from the extraordinary strength of the economy.

Mr Quinn and his colleagues will also be concerned about meeting public expectations for the Budget. He has substantial room for manoeuvre. Tax receipts are likely to remain strong and the exchequer finances will get a further boost from £119 million in tax revenues which will be paid this month rather than in December, because of a change in the rules for advance VAT payments.

Income tax reductions of £250 million plus are now widely expected on Budget day. To make an impact on the electorate, the Government is set to cut the standard 27 per cent income tax rate by at least one percentage point and possible by two. Consideration is also being given to reducing the 5.5 per cent employees' PRSI rate by one point, although the Department of Social Welfare may resist such a move. Significant increases in tax bands and allowances are also expected.

The temptation for the Government will be to go for the most generous possible package, in the knowledge that the strength in the economy would still bring in borrowing under the Maastricht 3 per cent limit. But this would be a mistake. Budget generosity must be balanced by achieving a low level of borrowing and another current budget surplus. Otherwise, when the slowdown in the economy comes, as it inevitably will, the Government of the day will be faced with having to cut spending or increase taxes at a time when growth is already waning.

The other reason for prudence is that adding too much fuel to the economy's fire could stoke up inflationary pressures. The latest credit figures will already have worried the Central Bank on this score and an expansionary Budget might tip the balance to getting them to move to higher interest rates. This in turn would push the pound yet higher in the ERM band, thus acting as a monetary squeeze on the economy.