New figures indicate that the scope for tax cuts in the Budget will be even greater than expected.
At the end of August, the Exchequer had recorded a surplus of revenue over spending of £2.2 billion (#2.8 billion). With the strong tax trend now set to continue into next year, leading market economists predicted last night that Mr McCreevy could afford tax reductions of up to £1 billion in the Budget.
According to Dr Dan McLaughlin, chief economist at ABN-Amro, the Exchequer position is now so strong that it will cause political problems for Mr McCreevy.
"Even the recently revised official estimate for a £1.7 billion budget surplus for the full year is now out of line. If tax revenues keep growing this strongly, the surplus will be closer to £2.5 billion," he said. The official estimate at the beginning of the year was for a surplus of £925 million.
He added that the Minister could now give even more than expected on Budget day to the newly established pension fund, as well as increase the amount of capital spending devoted to the National Development Plan.
"He can also afford to make very serious tax cuts of up to £1 billion," he said. "The objections coming from the IMF [in its recent report on the Irish economy] and others are nonsense as the record suggests that tax cuts boost labour supply. That approach has worked very well for us as has the the policy of tax cuts in return for pay restraint."
He added that the upcoming negotiations for a successor to Partnership 2000 meant it was even more important to deliver the tax cuts to keep wage inflation down and Irish competitiveness in place.
Mr Colin Hunt, chief economist at Goodbody Stockbrokers, believes the Minister can safely afford up to £900 million in tax cuts this December.
"At this stage of our economic development, one of the key risks is inadequate supply of labour and reducing taxes will increase the incentives to work. Leading more people into the labour market will also reduce wage pressures in the economy."
Other figures released yesterday also underline the continuing economic boom. Private sector lending rose 1.3 per cent in July from June, or 32.2 per cent from the year earlier. Adjusting for the impact of the Irish Life & Permanent merger, the rate would have been just below 28 per cent.
Residential mortgage lending also continued to boom, growing at 22.7 per cent from a revised 22.4 per cent in June.
The Exchequer figures, meanwhile, revealed that, in the first eight months of the year, the Government had an overall Budget surplus of £5.86 billion compared with a surplus of £1.03 billion at the same time last year.
Excluding the £3.7 billion of receipts from the flotation of Telecom Eireann, the underlying Budget surplus of revenue over spending up to the end of August was still £2.2 billion. The official estimates of the end-year position are based on the assumption that tax revenues will slow down but there has been no sign of this. At the end of August they were growing by 16.3 per cent, from 16 per cent in July, compared with a Budget target of 7.5 per cent. Even the Department's June revision of its full-year forecast was based on tax revenues growing at around 12 per cent, Dr McLaughlin noted.
All areas of tax are ahead of expectations. Expenditure taxes are up around 15 per cent to 16 per cent, with VAT up 15.1 per cent in August.
Income tax is up some 11.7 per cent compared with a Budget estimate of 3.6 per cent, suggesting that employment and probably wages are rising more rapidly than predicted.
Stamp duty is up some 28 per cent largely on the back of rising house prices as well as share sales.
Corporation tax is up some 34 per cent compared with a Budget projection of 10.8 per cent.
At the same time, the spending figures are very much in line with the Budget. Central fund spending - mainly debt service payments - is flat, while supply or day to day spending is up some 10 per cent, broadly in line with the Budget target. The strong Exchequer figures will also increase pressure on the Government to spend more money in a whole range of areas.
