Government spending picked up in August, leaving the Minister for Finance, Mr McCreevy, with the prospect of implementing spending cuts in December's Budget. The Minister has also been warned by the country's largest union, SIPTU, that it is expecting a £500 million tax giveaway in the Budget on the back of yesterday's exchequer figures.
They show that tax revenues continue to soar, although there has been a slight slowdown, while Government spending has been increasing.
Official figures show that Ireland was running a surplus, or balance of income over expenditure, of £736 million at the end of August compared to a deficit of £85 million for August 1996. The figures point to an overall exchequer borrowing requirement for the year of close to zero.
According to analyst, there should be no problem with affording a million tax giveaway if Mr McCreevy sticks to his spending commitments.
However, after the previous Government's Budget, spending growth is well ahead of Mr McCreevy's target. In addition, Mr Jim O'Leary, chief economist at Davy Stockbrokers, pointed out that the Minister's commitments will not apply until 1998.
Nevertheless, there may have to be spending cuts in real terms in his first Budget. According to Mr O'Leary, these could amount to just over £200 million.
He pointed out that there is little room for manoeuvre in pay or social welfare and, as a result, there could be significant adjustments in other areas and even cut backs. He added this is despite the new Government's net target affording a couple of degrees more freedom in spending than the previous incumbent's gross target.
Mr Jim Power, chief economist at Bank of Ireland, also warned that spending growth of this magnitude is too high and the Minister will be seeking to rectify the situation. "To hit this target, spending will have to be seriously curbed in the next Budget," he warned. "That will be one of the first economic tests of this Government."
However, there is also likely to be considerable scope to cut taxes. Under the terms of Partnership 2000, the Government is only obliged to deliver £500 million over two years. Mr Des Geraghty, national industrial secretary at SIPTU, has called on the Minister to "keep faith with the compliant taxpayers". He added that the Minister must now give at least £500 million in direct tax relief to the PAYE sector through a targeted increase in the tax-free allowances and a broadening of the standard rate tax band. "This should ensure workers on average industrial wage are not paying the punitive 48p in the pound," he said.
He called for a tax-free allowance for child care and for tax relief on the genuine cost of getting to work.
Mr Michael Crowley, economist at Davy Stockbrokers, who correctly forecast the borrowing requirement, pointed out that supply services spending, or the amount the Government spends for the day to day running of the economy, had grown by 5.8 per cent at the end of August from 5.1 per cent at the end of July. At the same time tax growth has fallen back slightly to 14.7 per cent from 15.5 per cent at the end of July.
Meanwhile, figures from the EU statistical office, Eurostat, show that Irish taxes and social contributions formed a lower proportion of gross domestic product than in any other EU country for which data is available .
The Eurostat figures show taxes and social contributions made up 34.5 per cent of Irish GDP, compared to 36.4 per cent in 1995 when Ireland had the 11th lowest percentage of GDP.
The 34.5 per cent figure for 1996 compared to an EU average of 42.4 per cent. Ireland is one of only four EU countries below the EU average, with Germany, the UK and Spain also having tax and social contributions as a proportion of GDP below the average.
