Budget choices will depend on the form of the international economy, whichis as hard to predict as the Galway races, writes Cliff Taylor.
It's only July and the Budget soundbites are already coming thick and fast. "The hard choices will not be avoided": "the pain will have to be shared out": it will be the "toughest budget in a decade".
Government "sources" - aided by a few "dismal scientists" - have been outdoing each other with warnings about December's Budget. The public is being prepared, and the Government will hope that after the shock-and-awe soundbites they will be relieved by the real thing.
As ministers head off for the August holiday, just how bad is the budgetary situation? Tough but not yet grim is the answer. The Government will be hoping that some recovery in the economy will allow a minimalist package, in which - like this year - it gets by through stealth taxes and levies. This would not be a particularly pleasant Budget, but nor would it involve dramatic corrective measures. For those of us old enough to remember the tough budgets of the 1980s it would be positively gentle.
However, if the international economy takes another turn for the worse, more drastic measures will be needed to stop borrowing rising sharply. And ministers must be worrying that if this happens they have left themselves nowhere to go in budgetary terms. It is a vulnerable position and one which must leave them ruing the spending spree of 2000-2002.
The recent mid-year Exchequer figures show that the economic slowdown is hitting tax revenues hard and Minister for Finance Charlie McCreevy already faces a substantial gap between revenues and likely spending next year. The key question is how big this gap will be. This depends on whether the international economy starts to lift. If it does, then Budget 2004, to be delivered on December 3rd, is likely to look similar to this year's minimalist but slightly painful version. McCreevy will try to keep day-to-day spending as tight as possible, allocate as much as he can to infrastructure investment and keep tax changes to a minimum.
There is a reasonable chance that this will, indeed, be the shape of a rather dull Budget 2004. But it is far from certain, with the economy taking a turn for the worse in recent weeks and clear signs of an international recovery still awaited. As McCreevy himself said this week, the upturn has been "six months away" for some time now.
If the world economy turns down again, the recent spate of job losses could intensify, tax revenue growth would be hit and the gap in the budgetary arithmetic would quickly grow. If the Minister needs to look for considerable extra revenue on Budget day, then he has already closed off some options. This week he has said that he does not intend to change the terms of the SSIA accounts, that he will continue to pay money into the national pension fund and that, provided the unions meet their side of the deal, he will honour the terms of the public pay benchmarking terms.
Reversing on any of these would involve considerable political flak. And a Government which has made low taxes one of its defining virtues will not want to engage in any general hike in taxation. So the coalition has no obvious escape route if the budgetary numbers turn nasty, bar another raid on the Central Bank reserves, currently the subject of a review in Dame Street and still a potential source of once-off revenue next year.
Even with the relatively fair wind an international recovery would provide, it will not be an easy Budget to frame. This week, McCreevy conceded that lower tax revenues meant that borrowing this year - using the EU general government deficit measure - would be 1 per cent of GDP - or around €1.3 billion this year and this will rise further in 2004.
As the EU borrowing measure does not count money paid into the national pension fund, the actual amount of cash the Exchequer needs to borrow will be at least €2.25 billion this year and some €3 billion next year.
The problem for McCreevy is that if growth slips, the borrowing requirement rises quickly. Thus, a sustained downturn could quickly bring the borrowing total from about 1 per cent of GDP this year up toward the EU limit of 3 per cent. That Germany and France will breach this limit in 2004 for the third year, apparently without penalty, is leading to calls for McCreevy to borrow more for infrastructure spending. As a Minister who has made a virtue of avoiding borrowing, he is unlikely to pay much heed.
Provided the outlook isn't too bad, the 2003 budgetary tactic of taking money out of people's back-pockets rather than actually increasing tax rates will be repeated. So the main income tax rates will not change, but by omitting to adjust tax bands and credits for inflation the tax take will rise a little. Drinkers may be hit by extra excise duties, with the Government pointing to evidence that publicans have been pushing up prices. Various other levies will be examined to help close the gap. New carbon taxes - a potentially significant revenue-raiser - do not look set to feature in this year's package.
On the spending side, meanwhile, it will be tight. The Government will not admit it, but it is clear that the 20 per cent-plus annual spending increases of recent years were way over the top and did not deliver value for money. The political "spin" on this is that we spent the money when we had it and must now adjust to the "new reality" of slower growth.
However, economically, this has meant adding money to an overheating economy and slowing spending growth substantially at precisely the time the economy slows - the opposite of the ideal tactic. Politically, it has meant huge difficulties as the inevitably crude measures required to slow down runaway spending are reflected in areas such as the health service. This has left the public disillusioned and provides an easy target for the Opposition.
Spending pressures will, if anything, intensify next year. The next phase of the public pay benchmarking bill falls due for payment in January and total public pay is set to rise by €1 billion. There will be very little left over for increased spending in non-pay areas, with what extra there is going mainly to the health service. The Government will try to maintain capital investment spending on big projects. This strategy could yet be thrown off track if the international economy deteriorates this autumn. Then things could turn really ugly.
As they adjourn to the Galway races, ministers will be closely watching "the form" of the US economy. And they might even put a few hopeful euro on No Need for Alarm, entered for the Galway Hurdle next Thursday.