The economy of this State has, probably, never enjoyed such robust good health with record levels of growth and job creation - accompanied by low inflation and low interest rate levels. After a succession of expansionary years, there is a palpable sense of confidence in the economy; those in employment feel more positive about their future and are more inclined to spend their money. The fruits of our new-found economic strength are, of course, not equally shared - the continuing high level of unemployment and social exclusion is deeply worrying - but the overall sense of confidence about our economic future is probably unparalleled in the history of the State. In these heady circumstances, the warning from the International Monetary Fund (IMF) that the economy is in danger of overheating is welcome. In the current economic climate there is always a danger that the stream of very positive figures about the economy will give rise to complacency. But the IMF, the influential international institution based in Washington, has fired a warning shot. This year's Budget, it warns, was too generous and next year's should aim to eliminate borrowing entirely. It is now essential, it states, that the Government moves to control public sector pay and limit the overall growth in spending. In a blunt assessment, the IMF states that its directors "were of the view that continued growth at the pace of the last few years carried risks of overheating. The authorities, it says, must be "vigilant for signs of emerging strains with particular attention to the tightening labour and housing markets."
The IMF was also critical of the medium-term financial targets set down in the last Budget, arguing that more ambitious targets should have been set, given the strong growth in the economy. The Department of Finance in its outlook published last week sent a similar signal, recommending that the 1998 Budget should aim for no borrowing. All of this could present some awkward dilemmas for government. The electorate will be looking to the Government, in its first Budget, to deliver on its campaign promises of lower tax rates. Few would dispute that there is a strong case for tax reform for the PAYE sector, who continue to shoulder an excessive tax burden. But there is a clear danger that an expansionary budget with hefty tax cuts could help to overheat the economy - as the former finance minister, Mr Ruairi Quinn, pointed out this weekend. The Government must also legislate for other potential difficulties if sterling's current strength endures, principally in relation to monetary union which is scheduled to begin in January 1999. In his brief period in office, the Minister for Finance, Mr McCreevy, has already made it clear that he intends to manage the economy in a prudent and conservative way. This Government is in a good position to build on present prosperity. But in the challenges ahead on public sector pay and on taxation policy, it might do well to heed the salutary warning from the IMF.