THE "biggest tax reduction package in the history of the State" proved to have few surprises. In a blatantly politically inspired package, the Minister for Finance Mr Quinn has given a little to everybody. The headline figures look very impressive with strong growth, rising employment, a balance of payments surplus and a low Government deficit.
But the £400 million of tax cuts and spending increases will add around 2.5 per cent to personal consumption this year and one result could be a rising inflation rate. Even the Minister has inflation pencilled in at 2.2 per cent this year from 1.6 per cent last year. That is getting close to the likely ceiling of 2.5 per cent for those wanting to qualify for the single currency.
And many commentators say that 2.2 per cent is a very conservative estimate. Dr Dan McLaughlin, chief economist at Riada Stockbrokers, is expecting an inflation rate of 2.5 per cent.
"The risk is simply because the economy has already grown by 26 per cent in real terms over the last three years, said Dr McLaughlin."That means we could already be operating, at or very close to full capacity.
One factor which is pushing inflation higher is the low rate of the pound against sterling, which will push up prices in the shops here. However, the Minister's forecast assumes that the pound will remain strong against most other European currencies, which will continue to hold back inflationary pressure from the rest of Europe. It is. unlikely that the Central Bank will take such a sanguine view of the risks.
Only last month it was warning of the dangers of an expansionary Budget. However, quite what it can do is unclear. One option would be to raise interest rates but that would risk pushing the pound up further in the ERM band. So that must be seen as unlikely.
Higher excise duties could also edge up the inflation rate, at least. The increases announced - 7p on a packet of cigarettes and 1 1/2p to 2p on a litre of petrol will add about 0.2 of a percentage point to inflation. One reason why Mr Quinn decided not to increase the price of alcohol was that it would have added even more to inflation.
With these inflationary pressure in the pipeline Mr Quinn will be sincerely hoping that the Partnership 2000 agreement is adopted. He stressed the importance of the agreement over and over again in his Budget speech. If the package were rejected that could add significantly to wage inflation, making it much more difficult to stay under the Maastricht ceiling.
The Minister is also pencilling in higher borrowing next year and the year after. As part of the move to multi annual budgeting, in line with UK practice, Mr Quinn has given three year forecasts for most of the main economic indicators. The main difference between Mr Quinn's projections and those of the British Chancellor of the Exchequer, Mr Kenneth Clarke, is that Mr Clarke does pencil in an intention to return to zero borrowing.
"Mr Quinn's intention to actually borrow more suggests that he is not at all bothered with tightening fiscal policy," Dr McLaughlin said. That could prove a risk strategy.
Nevertheless, the move to multi annual budgeting is welcome. It is likely to remove some elements of short term thinking and will help to ensure that Budget policy will be more inclined to have a medium term perspective.
The other innovation in the Budget was the introduction of a contingency reserve. This put money aside to allow the Government room for manoeuvre if anything unexpected were to happen. The hepatitis C scandal, the BSE crisis and EU fines are a few examples of where this would have been useful recently.
However, the addition of the reserves does exaggerate the projected deficit in 1998 and 1999. Before the contingency the general government deficit is projected to fall from 1.5 per cent this year to 12 per cent next year and 0.9 per cent the year after. However, if the contingency fund is included the figure for the deficit for all three years is 1.5 per cent of gross domestic product.
The Budget is clearly politically inspired. The main beneficiaries will be the middle income voters, who played a large part in electing Labour last time.
As Mr Jim O'Leary, chief economist at Davy Stockbrokers, said, if political considerations had been left to one side, the tax and PRSI giveaways would have been focused at the lower end of the pay scale. Instead, middle income earners are to gain most.
The Minister could have put more money into increasing exemption limits and tax free allowances for the very low paid. The notion of introducing a lower 20 per cent rate for the first £5,000 of earnings would have also closed the gap considerably.
But, in an election year, the Minister is looking for maximum voter impact. Whether he achieves it or not will be a key factor in determining who will present the second Budget of the year in November.