THE economy will continue to grow strongly with inflation remaining subdued, the Minister for Finance, Mr Quinn, forecast in his Budget speech yesterday. At the same time the Minister has become the first to target a current budget surplus for the year ahead - at around 1.5 per cent of GNP.
According to Mr Quinn, growth will run at 5.5 per cent this year, then fall slightly to 4.5 per cent in 1998 and 1999.
At the same time he is predicting a rise in inflation from 1.6 per cent last year to 2.2 per cent this year. This is mostly due to the impact of the falling exchange rate against sterling and of growth in disposable income as a result of the Budget.
Out of the £200 million in tax cuts and a similar amount in spending, Mr Quinn is expecting almost £100 million to flow back into the Revenue's coffers in terms of tax buoyancy. That is the equivalent of adding one per cent to growth, according to Dr Dan McLaughlin, chief economist at Riada Stockbrokers.
It will also add about five per cent to real disposable incomes this year, and the same amount to consumer spending. Public consumption is also expected to rise - but by a smaller amount.
However, there will be an increase in the numbers working in the public service this year.
Average earnings in the public service are expected to rise by six per cent this year, compared with 4.5 per cent for the rest of the non agricultural sector.
Mr Quinn was also very upbeat on prospects for jobs. According to his estimates there will be a "further substantial increase" of about 45,000 in total employment in 1997. In the following two years he is expecting an average increase of about 35,000.
Taking into account the growing labour force, unemployment on a Labour Force Survey basis is expected to fall by only about 7,000. This translates into around 11 per cent of the labour force.
The Government is predicting that the average on the live register in 1997 will be 262,000, lower than the average 1996 level of 279,000.
Of course, one of the main priorities for the management of the economy over the next year is to ensure that we qualify for entry to the single currency. Mr Quinn stressed that the Government is "determined" that Ireland will fulfill the Maastricht criteria for entry to monetary union.
"There is a danger that continuing strong domestic demand and exchange rate fluctuations could lead to the emergence of inflationary pressures," the Department of Finance warned in its "Economic Background to the Budget".
The statement added that a "prudent mix of tax reductions and modest pay increases is designed to ensure that this does not occur.
But according to Dr McLaughlin, the potent combination of tax cuts and spending increases could trigger higher inflation. "There is absolutely no way this could be described as a fiscally responsible Budget" he said.
Meeting the deficit criteria will be less of a problem. Despite the big increases in spending, the general government deficit will rise to 1.5 per cent of gross domestic product this year, well below the three per cent ceiling under the single currency rules.
Even next year and in 1999, the deficit is forecast to remain at that level. Nonetheless, a "contingency reserve" has been introduced to help pay for any unforeseen calamities.
The outlook for exports also remains broadly positive, despite an "unfavourable" competitiveness position. Expanding capacity in the high technology sector, as well as strengthening growth in many of our markets, should counter the problems, according to the statement.