Opening target of 7% of GDP lower than some forecasts

EXCHEQUER DEFICIT:THE GOVERNMENT'S opening target of an exchequer deficit next year of 7 per cent of gross domestic product - before budget day announcements - is not as bad as the 8.5 per cent deficit projected by Ulster Bank chief economist Pat McArdle at the Kenmare economic conference in Co Kerry last night.

The reason for the Government's more modest deficit is that the Department of Finance's tax revenue forecast for 2009 of €41.2 billion is some €3 billion higher than the majority of independent forecasts.

"The Government forecast for tax revenue is optimistic," said Davy Research chief economist Rossa White, who is forecasting 2009 tax revenue of €38 billion. Mr White said the Department of Finance's estimates for the full-year 2008 tax shortfall could also be exceeded by the end of the year.

Despite the lower than expected starting position, Minister for Finance Brian Lenihan will still need to spend at least a net €500 million on social welfare spending to cope with the higher number of claimants and index the payments in line with inflation. He can only hit the 7 per cent target if he recoups some of this expenditure through a series of tax increases and spending cuts on budget day.

"It is a very, very high figure," said Mr McArdle. "We could have a modest budget, or we could have all kinds of special measures on budget day," he said.

Economists expect that the Government will choose not to increase tax bands and credits in line with inflation and wage increases, which will put a further squeeze on households already coping with a high debt burden.

A deficit of about 6 per cent would still be way in excess of the 3 per cent specified by the EU Stability and Growth Pact (although this agreement does include some leeway) and higher than the 5.5 per cent recommended by the ESRI earlier this week.