In order to hide the fact that, with revenue from normal sources, Charlie McCreevy's tax cuts and expenditure increases would have pushed his Budget into a deficit of almost £1.5 billion, he has had to scrape the bottom of the barrel in his search for windfall revenue.
The public was prepared for a deficit of about £500 million - such a figure had been mentioned in pre-Budget speculation. But had it emerged clearly in the Budget speech that, following last year's huge expenditure increases, this year's Budget increase of 12 per cent in public spending was going to push the deficit up to three times that figure, this, rather than the "goodies" Mr McCreevy had delivered, might have dominated the headlines in the next day's papers.
Whatever about the timing of his decision to bring forward at this point the payment of Corporation Tax, in itself this decision seems to me to be justified. In his speech, the minister pointed out that bringing these payments back gradually to the year in which the taxable profits are earned would be in line with the practice in many other OECD countries.
Moreover, this seems to be a reasonable way to recover some of the receipts from this tax that are being lost through the gradual reduction of the tax on services to 12.5 per cent. Nevertheless, I would not like to be the minister for finance in 2007 who will have to face the disappearance of what will by then have become an annual windfall of over £900 million!
The other £1 billion of windfalls that the minister has drawn upon in order to avoid the stigma of a visible overall budget deficit this year are more temporary in character, however. Moreover, in some respects, they are more questionable.
For it now appears that bringing back from the year 2003 to next year the payment to the Government of the £190 million Central Bank profit from the withdrawal of Irish banknotes is subject to approval of the bank's board, which has yet to be secured. And Central Bank assent to Government requests is not to be lightly assumed, as I discovered when, in the crisis I inherited in June 1981 I sought, but, no doubt for good reasons, was refused an overdraft from the bank!
It has also belatedly emerged that the transfer to the Exchequer of both this Central Bank windfall and of the other one needed to complete the process of hiding his £1.5 billion deficit - viz. the £290 million of reserves built up by the issue of coinage - require the approval of the European Central Bank, which has yet to be sought.
Neither of these elements of conditionality, which together govern the availability of £480 million to the Exchequer, were disclosed in the Budget speech.
According to Table D2 in the Budget documentation, the disappearance in 2003 of these two windfalls, and of that deriving from raiding the Social Insurance Fund surplus, will reduce the buoyancy of Exchequer receipts next year to a miserable 4 per cent.
It is important that we should not be misled by these pre-election manoeuvres into ignoring the scale of the deterioration in our finances that has occurred this year. Tax receipts are now estimated to have fallen short of last year's Budget estimates by no less than £2 billion, or over 8 per cent. At the same time spending has run £800 million, or 3.5 per cent, above the projected level. Even though non-tax revenue has been higher than expected, this has left us with a Budget surplus only one-tenth the size of that forecast by the minister a year ago. By any standard a 90 per cent error in such a figure is deeply disturbing.
Worst of all, we have been given no explanation as to how a 2 per cent shortfall in our GNP by comparison with the Department of Finance's projection a year ago could have led to a shortfall of well over 8 per cent in their forecasted tax revenue. This huge unexplained revenue shortfall raises serious questions about the validity of the projections of revenue buoyancy that were made a year ago.
Until and unless this issue is clarified so that we can be assured that the revenue estimates in this year's Budget are free from whatever factors may have bedevilled last year's estimates, it is difficult to take without several grains of salt this Budget's 2002 buoyancy calculations. It should be pointed out that this Budget has been based upon a GNP growth projection for next year which is higher than those of both the ESRI and the OECD.
From Table €7 in the Budget documentation we can see that the percentage of our GDP absorbed by general government expenditure is now forecast to rise between 2000 and 2004 by over 3 percentage points, whereas on these projections receipts will have fallen by 2 percentage points. These two contradictory movements will have turned a surplus of 4.5 per cent of GDP into a deficit of 0.5 per cent at a time when the Department of Finance estimates that we will have two years growth of over 5 per cent a year.
Hitherto our exceptional rate of economic growth has enabled us to increase the volume of public spending substantially whilst at the same time reducing year-by-year the tax burden and at the same time securing a growing budget surplus. But now we are in a down-turn, and are likely, even after recovery from current difficulties, to experience annual growth rates of at most 5 per cent in the years ahead rather than the 8 per cent-plus growth rate to which we have, perhaps, become too accustomed.
In the UK - where even in the Thatcher years the tax take was higher than ours is today - the downward slide in government revenue as a proportion of GNP was halted and modestly reversed after the Labour Government came to power in 1997. And - admittedly in a post-election situation - the Chancellor of the Exchequer has recently started to raise publicly the need for a more overt increase in taxation, in order to finance adequately the National Health Service.
Because of our exceptional economic growth in recent years we have been able to avoid this issue longer than has the UK, but, whatever political parties may be in power after the next election here, for similar reasons that government will undoubtedly have to face the need for some increase in our phenomenally low tax burden. And the fact that this year's Budget balance has been so hugely dependent upon one-off windfalls, suggests that this problem may start to hit us next year.
gfitzgerald@irish-times.ie