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The Tánaiste and Minister for Finance Brian Cowen TD today published the Pre-Budget Outlook incorporating the Pre-Budget Estimates for Public Services in 2008. The Pre-Budget Outlook updates the economic and fiscal projections for the period 2007 to 2010. It has also been expanded to include detailed Pre-Budget Estimates of the resources required to maintain the existing level of public services in 2008. The Outlook forms part of the new arrangements for the introduction of a Unified Budget this December that the Tánaiste announced on 13 September last. Launching the PBO, the Tánaiste said that: “This publication represents another important step in the budgetary reform process and will enable greater transparency and understanding of public sector funding.” The Tánaiste points out that 2007 represents a turning point for the Irish economy. While the economy has performed reasonably well in the first half of this year, the current indications are that the short- to medium-term outlook has changed vis-à-vis that envisaged on Budget day. GDP growth of the order of 4¾% can be expected for this year. Looking forward, GDP growth is expected to be 3¼% next year and to average 3½% for the period 2008 - 2010. The Tánaiste confirms that an Exchequer deficit of up to €1 billion is now forecast as opposed to a deficit of €546 million forecast at Budget time. However, a General Government surplus of 0.9% of GDP is expected for this year – the 10th in 11 years. On the basis of the technical budgetary arithmetic set out in the Outlook, the overall budgetary position at this stage points to a deficit of -0.4% of GDP in 2008 and 2009 and a balanced budget in 2010. The Tánaiste pointed out that these projections will be affected by any revisions to the forecasts between now and Budget day and by any policy decisions on spending or tax that are announced in the Budget. Commenting on the economic and budgetary forecasts the Tánaiste said that: “The lower growth going forward will have implications for us all. But we mustn’t lose sight of the fact that this performance is nevertheless impressive by international standards and one that many of our European partners would love to replicate.” The Pre-Budget Estimates included in the Outlook set out the estimated cost of continuing the current level of services for 2008. Overall, the figures show that the total gross current spending next year on existing services will be almost €51 billion. This is an increase of €2.3 billion or 4.8% over 2007. Spending growth is currently running at annual rate of about 14%. This €2.3 billion can be divided up as follows:
Policy initiatives involving an increase in public expenditure, above and beyond the Pre-Budget Estimates “existing level of service” figures, will be set out in Budget 2008. The Budget will include details of additional capital investment in line with the National Development Plan,. The Tánaiste commented that: “Fifty One billion Euro is a great deal of money and it is important that both the Government and the Houses of the Oireachtas look at what we are getting for this money, whether we are spending it on the right priorities and the value we are achieving for this money. Not every problem can be cured by spending more money. Priorities change and we must change our responses accordingly.” Finally the Cowen concluded that: “Our success to date has been built upon the foundations of sound public finances, and competitive economic policies that promote enterprise, investment and job creation. I believe that these policies – strengthened, reinvigorated and renewed – will stand our country in good stead into the future. Today’s launch of the new expanded PBO is part of our ongoing reform process.” Comment from Pat McArdle, Chief Economist, Ulster Bank: The Pre Budget Outlook is an initiative which was launched last year but has been extended and amended in the 2008 document issued today. Unlike other budget documents, it gives a snapshot of what the total Budget might look like if it were introduced today. It repeats what the Minister said a few weeks ago as regards 2007, namely that taxes will undershoot by up to a billion – this is now revealed to consist of a tax shortfall of €925million offset by a non-tax overshoot of €96million. In addition, there were savings on current spending, mainly service of debt, of €255million and on miscellaneous capital of €137million. The upshot was a deterioration in the projected General Government Balance (GGB) of €670million, reducing the surplus from 1.2% to 0.9% of GNP. This is still a healthy surplus, though our view is that the risk is that the outcome will be worse with the surplus around 0.75% of GDP. However you look at it, the 2007 Budget is still in good shape.
2008 is a different matter. The most recent official info on 2008 was provided in last December’s Budget. The budgetary scenario provided then was based on growth of 4.6%, employment up 2.1%, unemployment averaging 4.5% and house completions in the 70 to 75,000 range. Today, these forecasts were revised down in line with current mainstream economic thinking. Growth in GDP is now put at 3.25%, the increase in employment 1.25%, unemployment 5.5% and new house completions in the low 60,000s. Given that every 10,000 houses reduces revenue by a billion, lowers GNP growth by 1% and takes half a percent off the Government balance, the importance of the housing impact is obvious.
Today’s document is also qualitatively different from last year’s. Last year we got “no policy change” figures, now we are getting the cost of maintaining the “existing level of services”. This makes a bigger difference than one might suppose even if the Minister did attempt to give us a “bottom line” picture by including an “indicative unallocated provision” on which he will draw on Budget day. Having done all this, the GGB (General Government Balance) deteriorated by €2.6 billion from that projected last year and the 0.9% surplus turned into a 0.4% deficit. (Had he gone for a lower house completions figure – we have just revised our forecast to 55,000 – the deterioration would have been another billion and the deficit 0.9%).
Minister Cowen was at pains to emphasise that everything is subject to change between now and Budget day – 22% of all tax is received in November when CGT and self-employed Income Tax is paid. For this and other reasons, he wants to keep his options open. We do not know therefore whether he will aim for a surplus or deficit and I suspect even he is not sure at this stage. We do know, however, that this year’s Budget will be an even bigger show than usual, because the existing level of services has been very tightly defined and many things which in the past would have appeared in the pre-Budget Estimates Volume will now be kept for announcement on Budget Day.
Nowhere is this more evident than in capital spending. Last December, we were told that Voted Capital Spending would be €8.3billion. Now it is €7.6billion, or a reduction of 1% on the projected 2007 outcome. However, a billion has been put aside in an “unallocated NDP (National Development Plan) Provision” to be unveiled on Budget Day. In practice, this is mainly the NDP items being re-announced with the proviso that the total capital provision has been increased, not reduced, as some feared in recent months. Put another way, capital spending as a per cent of GNP, which is slated to be 4.7% in 2007, and was originally forecast to be 4.8% in 2008, has now been pushed up to 5.1%. This is a positive move and a sign that the Government intends to live up to its election commitment to keep the NDP as its number one priority.
Something similar has happened on the current side. Here planned spending has fallen by €0.8billion, bringing the projected increase down to 5% from 13% this year. However, the unallocated provision has gone up from €0.8billion to €1.5billion. Clearly, the latter includes many items which in the past would not have featured on Budget day. The Budget day spending package will be bigger than usual but the amount available for traditional Budget day measures will be more constrained, especially if taxes weaken further in the meantime. Last year, the Minister disbursed €2.2billion on Budget Day, split roughly equally between taxes and social welfare – this year; he will do well to have half that with the bias slanted in favour of welfare though much will depend on what happens between now and December. Given favourable circumstances, his total spend on Budget day could still be over €2 billion but much of this will be absorbed by items that would not have figured under the old system. A bigger show but a more delicate balance. © Copyright 2007 by Finfacts.com |
