ECONOMIC ANALYSIS: It is clear that Mr McCreevy has done everything possible to minimise the amount the Exchequer has to borrow to bridge the gap between spending and revenue, writes Cliff Taylor
Holding down Government borrowing was the primary aim of the Minister for Finance in presenting Budget 2003. There is no mistaking the Minister's aversion to going into the red. And it is clear that he has done everything possible to minimise the amount the Exchequer has to borrow to bridge the gap between spending and revenue.
Economically, the main price of the low borrowing requirement will be higher inflation, resulting from the increase in excise and stamp duties. These will add not far off 1 percentage point to the inflation rate, which is now forecast at 4.8 per cent next year. At a time when competitiveness is under pressure, this is a risky strategy, particularly if the increases feed through to the wage element of the talks now under way on a new national agreement.
Once the Minister decided to hold down borrowing - his target is a general Government balance in modest deficit to the tune of 0.7 per cent of Gross Domestic Product - then he hadn't many places to go in framing his Budget. For a Minister used to dispensing the bounty of a booming economy , it must have been an unusual feeling.
In deciding what extra to spend on Budget day, the Minister only did the bare minimum. Or at least once the Government decided to pay the first phase of the benchmarking report, it was the minimum possible. This report recommended increases for public servants which, if implemented fully, would add over €1 billion a year to the public pay bill. The Government had already committed to pay one quarter of the recommended increases, backdated to December 2001 and €565 million was allocated in the Budget to pay this bill.
The total rise in the public sector pay bill next year, when money already allocated in the estimates is added in, is a sizeable 10 per cent.
Because such sizeable resources are being given to the pay area, the Minister was left with relatively little for non-pay current spending. On welfare spending, he allocated an extra €500 million, half of what was given in last December's budget. Apart from a small extra allocation to health, there was no other additional current spending.
However, despite this, the 2 per cent rise in current spending announced on Estimates Day has still jumped to a 7 per cent increase after the Budget. This illustrates the pressure on current spending from the rising public pay bill. The Government is still facing negotiations on the rest of the benchmarking award. And with this in mind it has moved first to cap the overall number of public servants and achieve a reduction of 5,000 over the next three years.
Clearly difficult discussions now lie ahead with the public service unions on extra productivity and flexibility in return for the rest of the benchmarking payment. In turn, this will be an essential element of the difficult task facing the Government of getting additional value for money at a time of reduced resources.
Delivering the kind of improvements required in areas like health and education at a time of tight resources will be an enormous challenge and is an agenda set to dominate economic debate over the next couple of years.
Looking at investment spending, Mr McCreevy allocated an extra €200 million to the roads programme. He also indicated that a group of public servants will review the approach to getting the private sector involved in this area. The challenge facing the Government is to put in place a multi-annual programme for state-funded investment, to deliver the kind of infrastructural improvement required by the economy.
Having spent €1.1 billion on social welfare, public pay and roads, the Minister had to raise almost as much to hold down borrowing. Seldom before has a Minister hit such a wide range of targets. The most cunning "stealth tax" was the non-indexation of most income tax credits and the standard rate income tax band. This will automatically garner large amounts of extra revenue next year.
The Minister also got substantial sums from the increase in VAT and excise duties and from a range of stamp duty rises. The price of this, as mentioned above, was a higher rate of inflation next year. The Government hopes that the consumer price inflation rate will ease from 4.8 per cent next year to 3.5 per cent the year after and 2.5 per cent by 2005. However this is unlikely to wash with the trade unions in the talks, which are already in difficult waters
The Government is fairly downbeat on the growth forecasts for next year, expecting a 2.2 per cent rise in Gross National Product, rising to 2.9 per cent in 2004. This implies that the budgetary outlook remains tight. The Government is expecting the general government balance to rise from 0.7 per cent of GDP next year to 1.2 per cent in 2004 and 2005.
But this includes a new "contingency provision" of 0.4 per cent of GDP next year and 0.8 per cent the year after - excluding this, borrowing would remain roughly constant next year, falling somewhat in 2004. The borrowing figures look even more modest when adjusted for the fact that economic growth will be below par, as the European Commission is suggesting should be done. But one thing is clear: the era of the big giveaway Budgets is well and truly over and a new era of tight packages has been ushered in.
Cliff Taylor
Analysis
