Early in his Budget speech Charlie McCreevy set his own agenda, specifying four pressure points in the economy "that we have to watch closely and make sure they are tackled". How well does his Budget stand up when measured by his criteria?
His first pressure-point is the acceleration of pay increases this year. He is right to be worried on this score. In addition to the recent large increases in pay in the public sector, the annual increase in hourly pay in industry jumped in the 12 months to June last from 1.5 per cent to 7 per cent. For unskilled and semi-skilled building workers the rate of increase accelerated from 2.5 per cent to 6 per cent. And in this 12-month period skilled building workers' hourly pay rose by 14 per cent, on top of an increase of 10.5 per cent in the previous 12 months. It has to be said that the Government, by abandoning, at any rate for this year, its ill-judged election commitment to reduce tax rates, and by plumping instead for tax cuts directed primarily at the lower and middle income group, increasing their take-home pay by between 3 per cent and 5 per cent, has created a favourable climate for the forthcoming pay negotiation.
Charlie McCreevy's second concern is the upward trend of domestic inflation: between January and October consumer prices were rising at an annual rate of 3.5 per cent. However, this increase seems to have been exclusively due to the delayed impact of last year's rise in the value of sterling for, despite substantial pay increases in industry, the price level of manufacturing output was lower last October than a year earlier.
This year we have been greatly helped by the effective disappearance of inflation in the global and European economy, and by the fall of around 10 per cent in the value of sterling - the delayed effect of which should help to keep down prices during the months ahead. And, in so far as the Budget tax cuts and spending increases stimulate further consumer demand, the main brunt of this is likely to be borne by imports, and thus by the balance of payments. Our external surplus is in fact expected to disappear within the next couple of years.
Nevertheless, the combination of large pay increases, tax cuts and spending increases, together with interest rates reduced to a level unknown since the immediate post-war period, would pose a formidable challenge to any economy. We have to hope the Minister has not shot himself in the foot by bringing in a Budget which, despite planning for a surplus of almost 2 per cent of GNP, is expansionary.
His third worry is the emergence of a labour shortage in some sectors. Our unemployment rate fell by 35 per cent in the two years ended April last; at this rate it could be down to 5 per cent by this time next year - and in the Dublin region, the West and Mid-West, where unemployment last April was down to between 6.6 per cent and 7.1 per cent, we could hit that figure even sooner. At that stage we will be dependent for increases in the labour force upon what, by that time, could be a diminishing flow from the educational system - it will be 19 years since our birth rate started its decline.
A continuation of employment expansion at its recent rate - in the 12 months ended last April private sector employment is now officially estimated to have risen by almost 100,000 or 11 per cent - will shortly face us with the problems of full employment. These include strong upward pressure on wages as employers compete for scarce workers. Yet I see no sign in the Budget speech, or in any other utterances of the Government, of any recognition of how close we now are to full employment and of the consequent need to review our industrial policy.
The fourth problem worrying the Minister is the continued rapid rise in house prices. But the Budget has little or nothing to offer as a solution to this problem. The additional capital provision for local authority housing accounts for only one-eighth of the £358 million increase in voted capital expenditure.
This will increase the number of local authority dwelling completions only marginally - to a figure which will still be one-quarter below the 6,000 council dwellings which were being built each year during the first half of the 1980s - the period of the worst economic crisis we have known since the second World War.
If ever there was a time to expand public housing it is now - when both economic and social considerations dictate a need for rapid expansion of public investment in this sector.
THUS on Charlie McCreevy's own set of criteria he deserves a somewhat mixed accolade. He should be accorded good marks for not allowing his own ideological stance to prevent him smoothing the path to a further national pay agreement by appropriate tax concessions, which should also free up the lower end of the labour market. But there must remain a question-mark over whether this Budget may generate rather than restrain inflationary pressures. On the issue of the scale of spending increases in this Budget he was remarkably unconvincing - confining himself to a brief and unspecific claim that "the average annual increase in total net current spending is 4 per cent".
The fact is that both gross and net voted expenditure in 1999 are planned to rise by 9 per cent on last year. And this is half as big again as the planned increase of 6 per cent in voted expenditure in his Budget last year. When I average these two figures, I get an annual average of 7.5 per cent - not 4 per cent. On the specifics of the Budget, there is more to be said than this column has space for. But one must welcome the preparations being made to move to tax credits and away from the present tax structure, under which almost any concession made to the less-well-off automatically generates much larger, and costly, concessions to the better-off. This changeover will be a complex business and he is not to be criticised for having left it over to next year.
It is right also that in conjunction with the move to the 12.5 per cent Corporate Tax he should look at concessions within that system that could be clawed back to minimise the cost of this change.
Another important and more immediate move is the provision of £40 million to be drawn on especially by the health services to ensure against a breakdown arising from the Year 2000 computer problem.
There will be an especially warm welcome for the £57 million provision to deal with problems of educational disadvantage. Finally, a criticism. It is of crucial importance that social welfare rates keep up with wages - rather than being tied to inflation. Otherwise the gap between rich and poor will continue to grow. I thought this principle had been accepted by all parties - but this Budget has applied it only to pensioners, who are to receive a 7 per cent increase, which is close to the average pay increase. For the social welfare increases are little more than 4 per cent - except in the case of Child Benefit, where it is just under 10 per cent.
But much more still needs to be done to increase Child Benefit - both for social and economic reasons.
In last week's article comparisons were made between the purchasing power of personal disposable income North and South, drawing on an early draft of a paper by John Bradley and Douglas Hamilton. Material in a later draft suggests that the South did not in fact pass out the North in this respect until last year.