AnalysisThe Exchequer Returns for the first half of the year, published yesterday, indicate that the budget targets for 2007 should broadly be achieved.

Both tax revenues and day-to-day Government spending are evolving in line with expectations thus far this year. Capital spending is running ahead of target, due principally to accelerated allocations under the National Development Plan.

As a result of these trends, the exchequer ran a deficit of €1,427 million in the first six months of this year. Even if all budget targets are achieved by the year end, the exchequer will finish 2007 in the red to the tune of some €550 million. This would represent a steep deterioration on the €1.85 billion surplus generated by the exchequer in 2006. The Exchequer Returns indicate that the economy is on course to attain a real growth rate of around 5 per cent this year, Tánaiste and Minister for Finance Brian Cowen said yesterday. At budget time last December, the Minister was forecasting a growth rate of 5.3 per cent for 2007.

On Monday, the Economic and Social Research Institute (ESRI) projected a real GDP growth rate of 4.9 per cent this year. All of these forecasts indicate a slight easing in the pace of economic growth in the current year. In 2006, real GDP advanced by 6.0 per cent.

While the budget tax and spending targets for 2007 are likely to be safely achieved, the targets themselves have not been excessively demanding. The 2007 budget provided for a 13 per cent increase in day-to-day Government spending on the amounts expended in 2006.

While current spending in the first half was 16 per cent ahead of spending in the first half of 2006, officials at the Department of Finance yesterday expressed confidence that current spending would be back on target by the year end.

Given the continuing strength of the economy and the indulgent spending targets set, delivering the 2007 budget never looked like an overly onerous imposition on officials in the Department of Finance. However, the going gets tougher from next year onwards, and for two reasons.

First, economic growth is forecast to decelerate. The Department of Finance's own stability programme update last December projected that real economic growth would slow to 4.6 per cent in 2008 and 4.0 per cent in 2009. More recently, the ESRI earlier this week forecast that real economic growth would slow to 3.7 per cent next year, thereby knocking almost a percentage point off the department's initial growth estimate for 2008. Slower rates of economic expansion depress the growth in tax yields, particularly from taxes on consumer spending and employee incomes.

Second, Mr Cowen will face the mother of all budgetary battles as he seeks to almost halve the rate of current public spending growth from 2008 onwards.

The new Programme for Government implies current public spending growth of some 7.5 per cent annually, a far remove from the 13 per cent spending growth target set for the current year.

Thus, we should prepare for the spending pips to squeak in coming budgets.

For if they do not, the exchequer deficit will balloon.