Ireland May Face Fiscal Deficit In 2002

by Jason Gorringe, Tax-News.com, London

05 November 2001

This week's meeting of the EU's Ecofin Council will be prefaced tonight by a dinner of euro-zone finance ministers which will see a discussion of the fiscal response to September 11th.

Irish Finance Minister Charlie McCreevy won't be expecting any carping about Ireland's economic performance from his colleagues after the Commission recently backed down from its criticism of his last budget; yet back at home he faces pressures which IIB Bank chief economist Mr Austin Hughes says may push Ireland into a Maastricht-infringing deficit by 2004/05.

According to Mr Hughes, income taxes were down 9.5% in October compared with the same month last year. At the end of October, the Exchequer surplus was £1.78 billion, down from £2.9 billion at the same time last year. Instead of the projected 4% fiscal surplus, Mr Hughes says the surplus is likely to be whittled down to just £700 million at the end of the year, and he expects Mr McCreevy to be forecasting a deficit for next year, involving borrowing of £1bn plus.

According to Mr Hughes, there is likely to be substantial pressure from public sector pay, both through the Buckley (public sector wages) review and the benchmarking process. 'If it the benchmarking were to arrive at recommendations similar to the Buckley review, this could add £250 million to next year's spending and a further £750 million to the 2003 outturn,' he said. If this happened, the public sector pay bill could rise by 15 per cent in 2002 and 2003. 'On the assumption that capital spending is not cut back, this would mean the public finances risk being in breach of the Maastricht guidelines by 2004.'

According to figures released yesterday by the Department of Finance, public spending is still growing by more than 20%, while revenues are only up 2.6% this year, and monthly unemployment figures showed the first year-on-year rise in five years. The figures make the task of framing the next Budget very difficult for Mr McCreevy. He has warned in no uncertain terms that spending demands from other departments will have to be cut back this year. Nevertheless, the cost of measures announced in last December's Budget is likely to add £450 million to spending next year - and that's before taking into account the Government's prospective health initiative and pre-election increases in social security.

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