The scale and speed of the economic slowdown have played havoc with the public finances, writes PAUL TANSEY
THE STEEP deterioration in the economy's performance during the summer months has prompted the Government to bring forward Budget day 2009 to October 14th, some six weeks ahead of schedule.
However, the fast-forwarding of Budget 2009 will have a minimal impact on Government revenues this year. Except for any excise duties imposed in the budget, the bulk of the tax and spending changes announced on Budget day will take effect from January 1st, 2009.
The bringing forward of budget day will thus have no material effect on the performance of the public finances in 2008. As a result, the best possible financial outcome for the Government in 2008 is an overall deficit equivalent to 3.3 per cent of gross domestic product. This would leave Ireland in breach of the 3.0 per cent limit on budget deficits imposed by the European Union's stability and growth pact.
The primary economic motivation behind yesterday's decision was to put the stabilisation of the public finances in 2009 at the centre of the policy stage. In the absence of decisive corrective action - spending cuts, tax rises or some combination of both - the overall Government deficit for 2009 would be significantly worse than the likely outcome in 2008.
But yesterday's decision was also infused by a strong dose of politics. For it represents an attempt by the Government to seize back the initiative from those who have criticised it for a lack of leadership in increasingly perilous economic conditions. An early budget also pre-empts lobbying by special interest groups for piecemeal policy changes offered as panaceas for every economic ill.
The political dimension to yesterday's decision should not, however, obscure the very real crisis that has developed in the Government's finances this year. The scale and speed of the economic slowdown this year have played havoc with the public finances. In Budget 2008 the Government anticipated that the economy would grow by 2.8 per cent. On the basis of this growth forecast it projected a 3.3 per cent growth in total tax revenues and an overall Government deficit equivalent to 0.9 per cent of GDP.
But the growth failed to materialise. In July, the Government revised downwards its forecast for economic growth in 2008 to just 0.5 per cent. This was broadly in line with the July economic forecast from the Central Bank, which predicted a growth rate in real GNP of 0.3 per cent. The Economic and Social Research Institute, in its latest commentary, took a more pessimistic view, anticipating that the economy would contract by 0.4 per cent this year.
Slower growth means lower tax revenues. By the end of June 2008, tax receipts were running almost €1.5 billion, or 7 per cent, behind budgetary targets. At that point, the Government projected that the tax shortfall for the full year would reach €3 billion. In response, the Government announced a package of expenditure savings amounting to €440 million in 2008 and €1 billion next year.
But over the past two months the economy has been running on empty. The extent of the contraction in the real economy in recent months was demonstrated again yesterday by the steep rise in the numbers on the Live Register during August. The numbers claiming unemployment benefits last month increased by 9,100 to 235,100 on a seasonally-adjusted basis. Since the start of the year, the numbers claiming benefits have risen by 62,700, or by 36 per cent.
The exchequer returns for August, published on Tuesday, reflect this downturn in the real economy. They showed that the tax shortfall in the first eight months of the year had risen to €2.8 billion, almost the equivalent to the tax shortfall for all of 2008 projected by the Government just two months earlier.
In its statement yesterday the Government conceded that "a tax shortfall of at least €5 billion for 2008 is likely at this stage". Even allowing that the Government incurs no overruns on the spending side and succeeds in its savings campaign, this would leave the overall Government deficit this year at 3.3 per cent of GDP. Thus, even putting the best possible complexion on the public finance figures for 2008, the Government will be in breach of the 3 per cent limit on budget deficits imposed by the European Union's stability and growth pact.
An extremely tough budget for 2009 will be required to keep next year's deficit within shouting distance of the permitted EU limits.
• Paul Tansey is Economics Editor of The Irish Times