ECONOMICS:HAVING INDICATED that he would halve the rate of current public spending growth, Brian Cowen has instead increased it by 8.2 per cent, writes Paul Tansey.

This is going to be a tough year for Tánaiste and Minister for Finance Brian Cowen. He faces an economy on the slide, where forecast growth this year is the lowest rate in two decades. His 2008 budget plans are in deep trouble. As he fights this war on two fronts, his political, as well as his economic, reputation is at stake.

Up to now, Cowen has looked impressive. He is smart, well-briefed and articulate. He has talked a good game about the economy's future development needs. He has galloped all over the Opposition.

It is easy to shine though when the going is good. Until late in 2007, the economy was flying high and the public finances operated on autopilot, but now a stuttering economy has caused tax revenues to slip and Government deficits to widen. Thus this year poses Cowen a sterner test. It will demonstrate whether he possesses the capability to manage the economy in hard times.

Over the past decade, almost everything that could go right for the Irish economy did go right. Even when the tiger economy stumbled as export growth slowed after 2000, the economy quickly regained its balance. The pace of domestic demand growth picked up as the export boom tailed off.

The living has been easy for Irish finance ministers over the past decade. Increasing levels of earning and spending in the economy automatically generated more tax revenue for the exchequer.

Moreover, since the tax yield from employment and domestic spending is higher than from exports, the switch from foreign to home demand as the principal source of economic growth accelerated the flow of cash into the exchequer's coffers.

Cowen first took control of the national finances in September 2004. During the first three years of his tenure, the economy moved effortlessly ahead.

As shown in the table, between 2004 and 2007, the economy expanded in size by more than one-sixth, using real gross national product as the yardstick. The volume of consumer spending increased by one-fifth over these three years. The numbers at work grew by more than one-quarter of a million or by 13.6 per cent.

On foot of this swift growth in earning and spending, cash cascaded into the exchequer. In the three years to the end of 2007, the Government increased its tax take by one-third, with tax receipts rising from €35.8 billion to €47.2 billion.

With the economy operating close to the limits of capacity, it needed no helping hand from government. A large slice of the unexpected revenue growth generated between 2004 and 2007 could usefully have been put aside for a rainy day.

Instead, Cowen adopted a determinedly pro-cyclical budgetary stance. He raised public capital spending by almost one-half, which was justifiable to the extent that it increased the future productive potential of the economy.

But, in addition, he ratcheted up the rate of current public spending growth. Net voted current public spending increased by 6.8 per cent in 2004, as shown in the table. By 2006, the pace of public spending growth had picked up to 11.2 per cent. This was followed by a further increase of 12.3 per cent in 2007. On economic grounds, raising the pace of public spending growth was unnecessary. The economy was growing at a real annual rate of 5.5 per cent between 2005 and 2007. On political grounds, however, it was clearly deemed imperative.

Current public spending was increased by a cumulative 25 per cent in the two budgets preceding the 2007 general election. Yet again, political expediency trumped economic rationality.

However, Cowen is paying the price for last year's election victory, for he now finds himself trapped between two trends, one of his own making.

First, having levered up the level of public spending and accelerated its annual rate of growth, he has proved himself unable to contain what he has created. Initially, he indicated that he would halve the rate of current public spending growth in 2008. He failed to do so, choosing instead to raise public spending by a further 8.2 per cent this year.

Second, a slowing economy has denied Cowen the resources with which to finance his expansive spending plans. The economy has gone off the boil in the past six months. As a result, tax receipts have fallen below official expectations. During 2007, tax revenues produced €1.8 billion less than projected. In the first two months of 2008, tax revenues were 8.3 per cent below the amounts collected in the first two months of 2007.

The inevitable consequence is a widening exchequer deficit. From a surplus of €2.3 billion in 2006, the Economic and Social Research Institute is now projecting an exchequer deficit of €5.3 billion in 2008 with a further worsening to €7.5 billion in 2009. In the space of three years, the exchequer balance could deteriorate by almost €10 billion.

A deterioration of this magnitude in public finances cannot be countenanced. It would represent the first step on the road back to the bad old days of the 1980s. It is the responsibility of the Tánaiste to pre-empt such an outcome.

There is only one effective instrument at his disposal. Cowen must reduce the rate of public spending growth - current and capital - to reflect the shortfall in the Government's income.