Shrinking Irish Surplus Puts McCreevy Through The Wringer

by Jason Gorringe, Tax-News.com, London

08 October 2001

The latest tax collection figures from the Irish Exchequer graphically illustrate the stark choices facing Finance Minister Charlie McCreevy as he prepares next year's budget. After years of double-digit growth in revenue, for the year to the end of September, tax revenues are up a mere 2.2%, a long way short of the original target of more than 12%.

The impact on the Government's projected surplus is striking. The surplus forecast on budget day of £2.5bn, or 3.2% of GNP, is now expected to turn out at £1bn, or 1.3% of GNP.

A report from Davy Stockbrokers last week projected GNP growth slowing from more than 10% last year to around 4% this year and just 1% next year. The firm's analysts have reduced their forecasts for profit growth in 2001 for companies quoted on the equity market from 16% at the beginning of the year to just 5% now - and the trend in revisions remains firmly downwards.

'The most important influence,' says Davy, 'has been the economic downturn that has occurred in our main trading partners. It is clear that, even before the tragic events of September 11th, global economic growth had slowed very appreciably. This has a particular significance for an economy that is as open as the Irish economy. The Republic is one of the most open economies in the world. Last year exports amounted to 113% of GNP.'

Although the Central Bank takes a more upbeat view, forecasting in its most recent assessment growth in GNP of 3.5% for 2002, it is clear that McCreevy's ability to deliver further tax cuts or expenditure increases is severely circumscribed. Using the Department of Finance's own figures, current revenue and expenditure trends (before additional cuts or expenditures) would result in a surplus for 2002 of £500m.

'That means some tough policy choices will have to be made, says Davy, 'For the past several years the Government could afford to reduce taxes radically, accede to most demands for higher expenditure and still produce impressive surpluses. Those days are well and truly gone.'

'Given the new budget reality,' says Robert Watt of Indecon Economic Consultants, 'the case for further tax cuts is harder to make. Taxation as a proportion of national income has already fallen dramatically in recent years and is now lower than all other European countries. The current burden of taxation implies a lower level of public services than is likely to satisfy the public's demands. Further reductions could lead to greater budgetary pressures in the future.'

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