It was the day when international gloom and doom met domestic boom and bloom. Internationally, stock markets continue to suffer and few will believe that the late recovery in Wall Street is anything but a temporary respite as fears of a global recession grow.
Meanwhile, the economy here seems to continue to surge ahead regardless, with a sharp fall in unemployment last month and Exchequer figures indicating clearly that the boom continues.
If the international downturn does gather pace, then there is no doubt but that the economy here will be affected. However, the latest Exchequer and unemployment figures confirm that, for the moment at least, the economy continues to power ahead. The Exchequer figures were, if anything, stronger than expected. The surplus of Exchequer revenue over spending in the first nine months of the year was £1.3 billion. The Exchequer normally records a deficit in the final quarter, but even after this, Government forecasters now expect that the surplus for the full year will be £800 million. Private sector analysts expect that the total could be in the £900 million to £1 billion range.
Tax buoyancy is the reason why the figures are so strong. Tax revenues in the first nine months of the year were running 12.5 per cent ahead of the same period in 1997, compared with a Budget target of tax growth of 6.3 per cent for the full year.
Reflecting the overall strength of the economy, all areas of tax are showing a strong increase. Higher consumer spending is feeding through to soaring VAT receipts - up 15.9 per cent on the same period in 1997 - while the rising housing market is shown by a 28 per cent increase in stamp duties. Meanwhile, income tax receipts are up 10 per cent, due to increasing numbers at work and higher pay more than offsetting the impact of Budget day tax cuts. The strength of the jobs market is also demonstrated by the latest unemployment figures, showing a sharp drop of 5,100 in the monthly total of those on the live register, after adjusting for seasonal trends. How much longer can the economy continue to perform so strongly against an international background that is getting worse by the day? This depends entirely on the extent of the downturn in the world economy. This week the International Monetary Fund (IMF) cut its 1998 growth forecast for the world economy to 2 per cent from 3.1 per cent previously and predicted a fairly sluggish 2.5 per cent growth rate for next year. If this prediction of slow international growth - but not a major recession - is proved correct, then growth here could slow next year, but still remain fairly healthy. Forecasters expect that the economy here is expanding by 8 per cent-plus this year and that this could fall to a still healthy 5 per cent to 6 per cent next year, with most of the factors behind the recent boom remaining largely in place.
However, the IMF warned this week that things could end up much worse than it has predicted. In its words: "The potential for a broader and deeper economic downturn stems from a multitude of inter-related risks that make the current economic situation unusually fragile." It is this fear of an economic collapse that has spooked the financial markets. And if the slowdown internationally does turn to recession, then Ireland cannot escape the consequences, even if the current strength of the domestic economy can provide some insulation.
This combination of domestic strength and international uncertainty means that framing the Budget will be no easy task, even though the tax trends indicate that the Government will have plenty of financial leeway. The Minister for Finance, Mr McCreevy, signalled caution yesterday, saying that with international conditions threatening to slow exports, the Budget must not add "significantly" to domestic demand, particularly - presumably - consumer spending.
But the Government will also be conscious of meeting its promise of cutting the tax burden on the low paid and will argue that tax cuts here will not add in a major way to demand in the economy. This may be correct, but with interest rates set to fall quickly in the months ahead, there is nothing the Government can do to arrest the rapid growth rate domestically, with the risk of a significant international slowdown the main threat to our booming economy.
