WHILE IT may be hard at this stage to pinpoint precisely the out turn of this year's Budget, it is clear from the September financial returns and the Minister for Finance's comments on them that the picture at the end of the year will be a fairly healthy one.
Because revenue buoyancy has been exceeding expenditure overruns, the current account for 1996 will show a surplus of several hundred millions and, despite a less favourable out turn on the capital side, borrowing may well be as low as £300-£400 million, i.e. probably below 1 per cent of GDP, which is less than half the figure projected at Budget time.
That would certainly be a very favourable basis on which to build a Budget for election year 1997. Unlike countries such as Germany, France and Italy, where adherence to the Maastricht criterion on budget deficits is currently requiring significant expenditure cuts and/or tax increases, we are, and can easily remain, well within the required limits.
Thus our Budget deficit is within the Maastricht limits. Despite the property boom, our inflation is currently the third lowest in Europe; under the Maastricht criteria it is, in fact, Ireland, along with Germany and Luxembourg, which is now setting the inflation standard that the other EU states have to meet.
While our debt/GDP ratio is still well above the 60 per cent target set at Maastricht, the fact that we have already reduced this ratio by almost one third, and that it has recently been falling at a rate of six percentage points a year, brings us well within the Treaty formula, viz, that the ratio be "sufficiently diminishing and approaching the reference value at a satisfactory pace".
But, while the Minister for Finance's freedom of action in this Budget is not significantly constrained by the Maastricht criteria, he has to take account of a number of important domestic constraints. First of all, 1997 will be the fourth year of extremely rapid economic growth, a year in which the economy will certainly not need much of a boost and could, indeed, conceivably begin to overheat if it were the subject of excessive pump priming.
Moreover, in order to be prepared for possible difficulties in the medium term or long term future, the present period of exceptional economic growth should be used to build up budgetary leeway. Ruairi Quinn ought to be aiming to move the Budget into a surplus which, in a future period of economic slow down, could be used to cut taxes or increase public spending in order to maintain economic growth.
In the past we have failed to take precautions and have consequently entered periods of economic decline without the cushion of spare resources to stimulate economic activity.
IN OUR case there is, moreover, a third reason for prudent budgeting. Our uniquely rapid economic growth, which within the past decade has raised our GNP per head from 61 per cent to 81.5 per cent of the EC average, has moved Ireland as a region out of Objective One status so far as EU structural funds are concerned.
If we wish to maintain the present level of infrastructural investment, and this seems likely to be necessary, we shall have to find extra Exchequer resources to substitute for reduced EU funding. That is why the ESRI, in its medium term review two years ago, proposed that between 1996 and 2000 the budget balance should be improved by £650 million.
Nevertheless, even if, as one may hope, Mr Quinn prudently takes this favourable opportunity to move towards an overall Budget surplus, he will still have considerable room for manoeuvre in relation to tax cuts, as well as for modest increases in public spending in certain key areas.
The danger is that the favourable trend in our public finances could lead to a loosening of discipline on the spending side that would eat up resources. There are certainly a few legitimate and urgent social needs to be met, but a spending splurge combined with the tax cuts that are required to secure a non inflationary national pay agreement - cuts for which there is also, of course, a pre-election political imperative - could erode the margin needed in order to move towards an eventual Budget surplus.
A complicating factor may well be ministerial scepticism of Department of Finance economic growth and revenue forecasts. For ministers, and even Taoisigh, as I know from my own experience, are sometimes tempted to challenge what they see as undue pessimism by the Department, and this temptation will be particularly strong this year.
If its annual forecasts at budget time in the past four years had proved correct, our GNP growth from 1992 to 1996 would have been about 16.5 per cent; the actual GNP increase now looks like running close to 25 per cent. Similarly with employment: its budget time forecasts over the past four years added up to 86,000 more jobs; in fact, the job increase now looks like being 130,000.
Underestimation of economic growth and of employment inevitably leads to underestimation of tax revenue. If tax revenue during that period had risen at the rate forecast annually by the Department, the total increase would have been 24 per cent. In fact, tax revenue this year will be about 39 per cent higher than in 1992.
Much of this underestimation has, however, been understandable. Bluntly, no one, absolutely no one, in 1992 or 1993 foresaw a growth rate averaging 7 per cent a year over the period 1993-1996, and if anyone had forecast such a rate of growth three years ago, he or she would have been regarded as insane.
Moreover, the Department's underestimation of revenue seems to me to be accounted for by its underestimation of growth: the technical forecasting of the relationship between economic growth and taxation seems to have been accurate enough, at any rate up to last year.
It would certainly be unfortunate if in these circumstances ministers were to allow themselves to be influenced by past underestimation of economic growth, at well as everyone else, into relying on a similar underestimation of revenue in 1997. While next year will undoubtedly see farther growth, it must be unlikely that for a fourth successive year it will exceed expectations.
RETURNING to the issue of Budget tax cuts, I believe that much of the economic growth of the past to years has been due to the linkage of pay increases and tax reductions in three successive pay agreements.
There has been some criticism of this, linkage on the grounds that such agreements with the "social partners" may skew the tax system in favour of the more powerful groups in society, unions, management and farmers, at the expense of other weaker and less organised sections, such as the unemployed and the young.
There is substance in this criticism, and the resistance of the "social partners" to the inclusion of representatives of weaker sections of society in the negotiating process has been less than edifying.
However, on balance, the negotiation of tax/pay "trade offs" has been of benefit to the community, contributing to low inflation and high growth. Another agreement along similar lines, linked to tax cuts oriented towards the less well off, would in present circumstances be advantageous.
What has given rise to legitimate concern, however, has been the extension of these negotiations beyond tax issues and into spheres like employment policy that are properly the domain of government and Oireachtas.
This has aroused genuine tears about the erosion of parliamentary democracy in favour of a dubious corporatism, one from which the underprivileged (those who are neither employers nor employees nor farmers) are intentionally excluded. In the negotiations soon to start, regard should be had by all concerned to this legitimate democratic concern.