Finance prepares way for a tough December Budget

The Department of Finance has prepared the way for a tough Budget by cutting its forecasts for economic growth and warning that…

The Department of Finance has prepared the way for a tough Budget by cutting its forecasts for economic growth and warning that public spending must be kept in check.

The economy will grow by just 1.5 per cent this year, according to the Department's annual review and outlook, a reduction from its previous gross national product growth forecast of 2.2 per cent. It has cut its gross domestic product growth more sharply from 3.5 per cent previously to 1.5 per cent now.

The international recovery has been slow to appear, the Department warns and this was the main reason why it was forced to revise down the forecasts it made on Budget day last December.

The review and outlook is its first revision since the Budget and other forecasters have made similar downgrades in the meantime. But yesterday's review only covers the Department's forecasts for this year and does not indicate what its predictions are for next year, which will be the key factor in framing the 2004 Budget.

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Significantly, the Department also warned that declining competitiveness may also limit recovery. The Irish inflation rate has been well above the average of our trading partners in recent years and the Department warns that the rise in the euro's value this year has added to the competitive pressure on Irish firms.

The review welcomes the recent fall in inflation and says it will average 3.6 per cent this year, a reduction of more than one percentage point from its earlier 4.8 per cent forecast. But it warns that the stronger euro is hitting exporters and that unless costs and wages are reduced to EU levels soon, "we will lose jobs and growth".

The Department has cut its forecast for consumer spending growth and with the jobs market remaining weak, the review and outlook confirm earlier estimates that tax revenue this year will come in €500 million below target, pushing up borrowing to 1 per cent of GDP. With revenues set to remain sluggish next year, the Department warns that spending growth must reflect this. It says it is essential the spending programmes are prioritised and that there is a stronger focus on value for money. This is a signal to spending departments that the Department will fight to keep spending in check in negotiations on next year's Budget and will try to get Departments to justify existing spending, as well as identifying areas where they need more cash.

The text of the review and outlook suggests the Department believes that maintaining capital investment spending should be a priority, in order to develop the productive capacity of the economy and underpin long-term growth prospects. But the details of the forecasts suggest the Department expects capital spending to come in below Budget this year, while the growth of day-to-day spending will be above the Budget level. Overall it says spending should come in broadly on target for the year. Some saving may also be expected on debt servicing, though these are not identified.

In a brief comment on the review, the Minister for Finance, Mr McCreevy, who is on holiday, said it was essential that competitiveness was regained if the economy was to benefit from the international upturn.

Cliff Taylor

Cliff Taylor

Cliff Taylor is an Irish Times writer and Managing Editor