Economy: Budget 2008 will be constrained by lower than anticipated levels of economic growth in 2007 and the next three years, the Government said yesterday. Laura Slatteryreports.

Minister for Finance Brian Cowen has revised downwards the estimate for economic growth for this year to 4.75 per cent, from a forecast of 5.3 per cent made last December.

He said the economy had reached a turning point and was now entering a phase of much lower growth.

A slowdown in the housing market, combined with record oil prices, a weak dollar and higher interest rates mean growth in gross domestic product (GDP) is now expected to be 3.25 per cent in 2008. It is predicted to average at 3.5 per cent a year for the period 2008-2010.

The rate of unemployment is expected to increase from 4.5 per cent this year to 5.5 per cent in 2008-2010, with 10,000 more people expected to claim unemployment benefits.

The rate of employment growth in the labour market will slow down from 4.4 per cent last year to 3.5 per cent this year and 1.25 per cent in 2008 and 2009. This will result in the creation of about 26,000 new jobs next year, compared to 70,000 this year and 86,000 in 2006.

Mr Cowen also confirmed figures indicating that there will be a shortfall of €1 billion in Government revenues this year - almost double what had been expected - as a result of lower stamp duty, VAT and capital gains taxes generated by the declining property sector.

Tax receipts will be 2 per cent lower than last December's budget day target.

A general Government surplus of 0.9 per cent GDP is still expected for this year, but this is down from a surplus of 1.2 per cent estimated last December.

Despite the lower rates of economic growth, the Government's pre-budget outlook published yesterday forecasts a deficit of just 0.4 per cent of GDP in 2008 and 2009 and a balanced budget in 2010.

These forecasts however do not take into account any measures to be announced in the budget. The gloomier-than-expected economic outlook is likely to restrict the value of new spending or tax-cutting measures that will be announced on December 5th.

"The lower growth going forward will have implications for us all," Mr Cowen said. However the Government was "not suggesting we are on our uppers here", saying that the forecasted growth rate was still impressive by international standards and one that many EU countries would be happy to replicate.

The Government yesterday announced that it would spend €51 billion in 2008 - 4.8 per cent or €2.3 billion more than in 2007 - in order to maintain public services at their existing level.

An "indicative unallocated provision" of €1.5 billion is included in the 2008 forecasts "for illustrative purposes" and the Minister would not say how much more he was planning to spend next year.

Mr Cowen would not give any indication of whether he would proceed with a one percentage point cut in the top rate of tax in the Budget. He said spending under the National Development Plan remained the top priority for the Government, regardless of the economic outlook.

"It is the surest and quickest way of getting back to growth."