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Former Minister for Finance, Charlie McCreevy, was an accountant whose motto was "when I have it, I spend it". His successor Brian Cowen may not be an economist but he is much closer to economic orthodoxy and his motto might well be "When I have it, I put some away for the rainy day". The 2007 Budget does not get an unqualified economic approval but it comes closer to it than anything seen in recent years.
This was the first time in five years that a surplus was budgeted for. The estimated 2006 outturn is now a General Government surplus of 2.3% of GDP. The forecast 2007 position is for a surplus of 1.2%. Minister Cowen had always intended to run a surplus - six weeks ago his Pre-Budget Outlook envisaged a 0.4% surplus, however, an unexpected surge in tax revenue in November caused him to revise his position.
However, the fiscal stance is still expansionary. The surplus is falling from 2.3% to 1.2% so the Exchequer is boosting the economy. An alternative, more complex, calculation comes to the same conclusion, i.e. the cyclically adjusted budget balance deteriorates by 0.9%. With growth strong and forecast to remain so, some will argue that policy should have been neutral.
However, we are facing into a general election and this made it inevitable that policy would be expansionary.
Indeed, the surprise was that it was not more expansionary, given the frenzy of expectations that was whipped up beforehand. Last year, the Budget added €1 billion to current spending, €0.5 billion to capital and reduced taxes by €0.75 billion, to give a total package of €2.25 billion. This year, many pundits expected a €3 billion package. In the event, they got €1.1 billion extra spending, all current, and €1.1 billion in lower taxes, i.e. a package of €2.2 billion, much the same as last year's.
The income tax measures were more generous but there was a claw back in the form of higher tobacco taxes, the social welfare increases were broadly similar but somewhat more expensive while other spending measures cancelled out mainly because a major push on childcare last year was replaced by extra health spending this year.
This will disappoint some but the bottom line is that voted net current spending is budgeted to increase by 12.9% in 2007 as compared with 12.2% this time last year. Capital spending, which was forecast to rise by 12.4% in last year's Budget, is up 13.5% this time. Tax receipts, which were forecast to rise 6% last year, are up 8%. This reflects a less conservative approach by the Department and should lessen the chances of another overshoot.
Because much of it was leaked in advance, surprises were limited.
Thankfully, the Budget did not dismantle stamp duties which might have re-ignited the property market. Instead, the Minister doubled the mortgage interest allowance which is worth €1,600 to a standard rate taxpayer. This will help sustain marginal demand from first-time purchasers. The elimination of uncertainty regarding stamp duties could have a bigger impact if reports that this caused prospective purchasers to defer activity are true. We can expect only a limited boost in my view because the deceleration in house prices was underway anyway and we will get another reminder of things to come when the ECB raises rates again today.
The only other economic impact that springs to mind is not a positive one.
By raising cigarette prices by 50c, the Budget added 0.36% to consumer prices. This explains the relatively high, 4.1%, forecast for the 2007 CPI.
The 2007 Budget is framed around a modest acceleration in inflation from 4% in 2006 to 4.1% in 2007. This was not the picture when the current wage agreement was negotiated and may give rise to some recriminations from the unions.
Otherwise, the Budget assumes that the broadly favourable economic picture will continue. GNP is projected to grow by 5.3% in 2007 before slowing to 4.6% in 2008. It will be sustained by strong consumer spending which is forecast to grow by 7.3% next year, boosted by SSIA-related spending. These forecasts are close to our own. Employment, currently growing at 4.5%, will slow to 3.5% and the economy will remain in full employment. Like other forecasters, the Department warns of the external and internal risks but does not build them into its central scenario.
