The first Budget of the current Dáil was, by necessity, a tight one. The economic slowdown has depressed the outlook for tax revenues and, combined with the overspending of recent years, has pushed the Exchequer finances into deficit.
The primary goal of the Minister for Finance, Mr McCreevy, was to ensure that borrowing was kept to as low a level as possible, thus returning Exchequer finances to a sustainable path. He also intended, he said, to protect the vulnerable and ensure investment for the future.
The Minister is certainly making a genuine move to stabilise the Exchequer finances - and this is the most important goal of the Budget. That said, many of the poorest in society will receive only meagre increases from the Budget.
Politically, Mr McCreevy's strategy was to avoid criticism by raising small amounts of revenue from a wide range of areas, thus avoiding any increases in headline income-tax rates. The Government will calculate that the public will be relieved, after all the talk of a "hairshirt" Budget. However, consumers will quickly notice the down side when they find themselves hit by a whole range of new charges. In this way, the Budget adds to inflation, threatening the outlook for competitiveness.
In terms of the public finances, the target level of borrowing next year, at 0.7 per cent of Gross Domestic Product, is low. Arguably, a better Budget was possible if Mr McCreevy borrowed closer to 1 per cent.
In leaner times, it is clear that much greater emphasis will have to be placed on value for money in current spending. Here, the Minister has accepted various recommendations from the three-person committee he established to look at spending. Included are new measures to plan and review spending and a cap on public-sector numbers. These are sensible measures. The pity is that they were not introduced before the spending splurge of recent years.
As the report of the three experts concluded, it is difficult to justify the increase in public-sector employment in recent years, and the level of service in the major spending area of health has not matched the increased spending.
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In the spending measures, there are troubling comparisons. A total of €615 million has been allocated to increases in public-sector pay. Taken together with measures agreed prior to Budget day, this means €1.2 billion, or 10 per cent, more in the public-sector pay bill. A much smaller sum - €500 million - is being spent on social welfare increases, most of which - with the exception of old-age pensions - will just about keep pace with inflation.
The Minister's goal of underpinning partnership is laudable. But there is something badly wrong with the allocation of spending resources when one relatively well-off group gets significant increases, while the poorest barely keep pace with inflation.
What of investment spending? Mr McCreevy has allocated an extra €200 million next year to road building, which will be enough to get a few new projects started. Here, in the past, the Government has not done nearly enough to ensure value for money.
In this respect, the Minister's commitment to get a group to examine urgently the funding options for road investment is welcome. So is his commitment to investigate the allocation of money in this area over a period of years, moving away from the current unsatisfactory year-by-year budgeting. He should consider extending this study, and the multi-annual funding approach, to cover all aspects of the National Development Plan.
There is a case to borrow money to boost spending on infrastructure, provided that there is an adequate economic or social return. The concern now is that, with the budgetary outlook remaining tight over the next couple of years, we may be entering a period of lower than required investment in infrastructure. It is essential that this does not happen.
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On taxation, Mr McCreevy had to abandon his reforming ambitions. Most people will end up paying more tax next year, as the income-tax system has not been adjusted to account for inflation and there are increases in excise duties and a host of other charges. This will see inflation at close to 5 per cent, putting pressure on wage-bargaining and threatening competitiveness. At a time when crucial wage negotiations are under way, it might have been wiser to have a slightly higher borrowing requirement and a Budget which had a smaller impact on inflation.
The move to close down a range of reliefs related to property investment is welcome - if overdue. There is no justification for the continuation of these schemes and the Minister could have gone further and ended them in December 2003, as opposed to sticking to the existing end dates of December 2004. The banking sector can have little complaint with proposals for a three-year levy. The resulting cost must not be passed on to its customers.
Overall, there is one clear challenge emanating from the Budget. It is that the Government now faces an enormous task to deliver the required improvement in public services and investment in infrastructure at a time of tight resources. It is time to get away from the once-a-year focus on these issues and set in place a continuous drive to increase the efficiency and effectiveness of public spending.