Solid economic growth, a booming property market and higher than expected consumer spending have all contributed to a set of Government accounts that is likely to generate envy among our European neighbours.
An estimated Government borrowing requirement of almost €3 billion at Budget time has been cut to €500 million, leaving the Minister for Finance, Brian Cowen, in a comfortable position as he prepares for an extended general election campaign.
But all is not as rosy as it might appear. Exceptional buoyancy in the housing and construction market provided higher than expected revenue from stamp duty, capital gains tax and VAT, which came in €1.6 billion ahead of target. A number of special investigations into tax evasion by the Revenue Commissioners generated more than €500 million in extra income tax. And there was significant under-spending by major Government departments.
If these three features were stripped out, the outlook would be much less positive. And these elements are unlikely to remain so benign in 2006. The Department of Finance is predicting a relatively soft landing for the property sector, with new house completions likely to decline by 2.5 per cent this year, before dipping further in 2007. New construction projects, it is hoped, will absorb much of the employment slack. But serious risks are involved, since this sector accounts for such an unprecedented share of Ireland's economic activity and employment.
One of the most notable features of the economy in 2005 was the poor performance of exports in goods and services, which actually fell in volume terms during the first six months. And while exports revived somewhat in the latter months, the prospect of a sharp correction in the value of the dollar, leading to an appreciation of the euro, remains a real concern. Revenue from corporation tax was lower than expected.
Personal consumption was the main driver of growth during the year. That feature is expected to continue into 2006 as SSIA policies start to mature and the €1,000 child allowances provided for in the Budget take effect. In spite of the unexpected increase in the number of people at work, which increased by 96,000 as against a predicted figure of 35,000, income-tax receipts put in an extremely modest performance.
This would suggest that the majority of the new jobs were low paid. And while the full impact on income-tax receipts will only be felt this year, preliminary indications are disappointing.
In spite of these concerns, there is no denying the rude good health of the Government's finances. It will be important in the months ahead to protect the competitiveness of the economy and increase output through the negotiation of a new national wage agreement. But, with a growth rate of 5 per cent predicted for the next two years, Mr Cowen is presiding over an economy that is the envy of Europe.