The Department of Finance has told the Government to prioritise investment in infrastructure over and above meeting election commitments to improve public services.
In its annual assessment of the Republic's economic prospects, the Department reduced its growth forecasts for this year and gave a surprisingly forthright warning that spending on public services would have to be moderated as the Exchequer finances are hit by falling growth rates.
The 2002 Economic Review and Outlook says that the economy will expand by 3.6 per cent this year, compared to the 3.9 per cent forecast on budget day. This slowdown is seriously affecting the public finances, the Department warns, and the era when the Government could afford to both cut taxes and rapidly increase spending has ended. Public expectations must adjust to this, it says.
Yesterday, the Minister for Finance, Mr McCreevy, said that while the short-term outlook was subject to ongoing uncertainty, the economy remained well placed to achieve relatively strong growth rates.
"Ireland retains the potential for comparatively strong growth in the medium term, provided international growth is maintained and we maintain our competitiveness on world and domestic markets," he said.
Against a background of weaker economic growth and the resultant deterioration in the public finances, the Department said that there was a need for a "sharper sense of priorities". There was "much less scope" than a few years ago for higher spending on public services. It emphasised that the Government would have to carefully balance the need to invest in infrastructure against competing demands for those funds to improve public services or cut taxes. It went on to stress that investment in infrastructure was crucial to underpinning economic growth.
Last night, the Opposition said that the review provided further evidence that the Government misled voters about the state of the public finances before the election.
Fine Gael's finance spokesman, Mr Richard Bruton, said that the small reduction in forecast growth did not explain "the huge overruns in spending so far in 2002 and the enormous shortfall in revenue".
He said that the public had been "conned" into believing that the budget presented earlier in the year was built on solid foundations. "Promises about spending have been broken left, right and centre since the election, yet the Minister is now bemoaning the build-up of high expectations which his own Government - more than anyone else - sought to promote."
He accused Mr McCreevy of "wringing his hands about price inflation running at twice the rate of the rest of Europe but offering no policies to tackle the problem".
For the Labour Party, Mr Pat Rabbitte said the review showed that the Minister for Finance had got all his major predictions wrong. Given that the Minister had made no changes to his budget day forecasts, despite the worsening economic situation, there would be more cutbacks this year.
"In addition to deliberately deceiving the public about the state of the public finances in advance of the general election, it is clear from these figures released today that all his major predictions about the economy have been wrong."
The Irish Business and Employers' Confederation (IBEC) concurred with the Department's warning in relation to prioritising resources and welcomed the emphasis on investing in infrastructure.
"Slower growth limits the resources available for expenditure initiatives. Expectations must reflect this reality," it said.
The Department of Finance suggests that the Irish economy will continue to operate at full employment levels, with the number working expected to grow by 22,000, or 1.3 per cent, this year.
The upward trend in unemployment is also set to continue, with the Department forecasting that the number signing on the live register will average 4.75 per cent of the workforce, which is broadly unchanged from its previous estimate.
The cost of living will also be fractionally higher. The review points to a rate of inflation, as measured by the Consumer Price Index, of 4.5 per cent by year-end, ahead of its 4.2 per cent forecast. This is a cause of serious concern since, at these levels, Irish inflation would be twice the euro zone average.