Public spending must be kept under tight control, even though the economic outlook is brighter than it has been for some time, the Department of Finance has warned. Una McCaffrey reports
Ahead of the appointment of a new minister and key autumn negotiations on spending plans for next year, the Department has warned that public spending growth must remain in line with the rise in tax revenues.
This is essential if a low tax burden is to be maintained to spur economic growth.
The Department's annual review and outlook, published yesterday, predicts that borrowing this year could be €1 billion less than forecast, which is sure to raise speculation of scope for higher spending and a generous Budget.
The Department has raised its growth forecasts for 2004 to reflect the developing strength of the global and domestic economies.
The upgrades see Gross National Product - viewed by many as the best measure of activity on the ground - growing by 4.2 per cent this year, up from an earlier forecast of 3 per cent.
Rather than taking the more benign economic backdrop as a good time to increase spending, however, the Department is urging "sensible management" of Exchequer funds.
"Our reputation for fiscal discipline has been hard won," the Department notes in the course of a lengthy argument for restraint. It points out that the economy faces numerous risks, such as the further strength of the euro and higher oil prices. A faltering in US and consequently euro-area growth is also highlighted.
Domestic risks include pay increases exceeding levels agreed under the national pay agreement and excessive borrowing, the Department warns.
The body of advice offered in the review will be seen as counsel directed in particular to the new minister for finance, widely expected to be Mr Brian Cowen.
The outgoing minister, Mr Charlie McCreevy, underlined the fiscal restraint theme in his comments on the economic review. He said the economy would only grow at its potential rate of about 5 per cent if "we continue to manage our public finances in a prudent and responsible manner".
However, calls for extra spending in December will be supported by the Department's updated forecasts for the end-of-year Exchequer position.
Instead of borrowing €2.8 billion this year, as estimated on Budget day, the State will now face a deficit of just €1.8 billion, the Department says. This drop in the deficit projection is due to the Exchequer taking in much more in taxes than it had expected.
As well as a windfall of at least €677 million from the Revenue's investigations into offshore accounts, other taxes such as capital gains tax are forecast to come in at €600 million above target. Private-sector economists believe that even the revised forecasts may prove pessimistic.
The Minister for Education, Mr Dempsey, last night welcomed the review on behalf of the Government and said Mr McCreevy had left the economy well-positioned for the global upturn.
Opposition parties were less generous. The Fine Gael finance spokesman, Mr Richard Bruton, said he hoped the Government would make better use of "taxpayers' hard-earned cash" in forthcoming budgets than it had done in the past.
Labour's Ms Joan Burton accused Fianna Fáil of simply preparing for "a pre-election spending splurge", while the Green Party's Mr Dan Boyle said the excess funds now available were the result of forcing too many medium-paid taxpayers into the highest tax bracket.
The ICTU said the next Budget offered "a wonderful opportunity" for the Government to redistribute wealth and called in particular for adjustments to tax bands and credits aimed at low- to middle-income earners.