Economics: Next year will be a tough one for the economy. The latest published forecasts see gross national product (GNP) growth of 2.5-3 per cent, which would be the slowest pace of expansion since the early 1990s, writes  Jim O'Leary.

Given how much uncertainty surrounds many of the factors that influence economic activity here, the outcome could be very different from this and the balance of risks suggests that a materially weaker outcome is more probable than a materially stronger one.

In the circumstances, it is understandable that people look to the Government to "do something" and look to the Government's Budget in particular for countervailing measures.

Reflecting this search for solutions, in the run-up to last Wednesday, Minister for Finance Brian Cowen was variously advised to abolish stamp duties, cut income taxes, accelerate the roll-out of the National Development Programme, reduce current spending and a great deal more besides.

Inevitably, the advocates of at least some of these measures will have been disappointed.

The appropriateness of a particular "solution" depends on the nature of the problem being addressed, so any clear-headed policy advice must start by identifying what problems beset the Irish economy and then consider whether the Government can and should do anything about them.

The biggest problem for the Irish economy now - in the sense that it is overwhelmingly the single-biggest retardant of overall economic growth - is the sharp fall in housebuilding activity. It now looks like new house completions are in the course of halving over a two-year period: from 90,000-plus in 2006 to something like 45,000 next year.

It is important to recognise that housebuilding is moving from an unsustainable to a sustainable output trajectory. Perhaps it is happening more abruptly than was expected, but that is the essence of what is going on. The idea that the Government should arrest or retard the slowdown must be seen in this light.

The notion that the Government should seek to prop up an obviously unsustainable rate of housebuilding in order to afford the rest of the economy more time to prepare to step into the breach, as it were, is an especially curious one. Critically, it ignores the negative influence that a bloated housebuilding industry has exerted on the competitiveness of the rest of the economy through upward pressure on wages and other costs of production.

A contraction in housebuilding, therefore, may be thought of as a necessary condition for improving the cost competitiveness of manufacturing and internationally traded services.

Moreover, the sharper that contraction, the sooner it will be over and the sooner housebuilding activity can stabilise.

Before Wednesday, Cowen had been excoriated for his reluctance to cut stamp duty on houses. Indeed, the volume and intensity of the criticism directed at him on this score was out of all proportion to the substance of the issue.

He will have garnered some plaudits from the reforms he announced in his Budget speech. What effects they have, however, remain a matter of conjecture. My own judgment is that any stimulus they provide will be slight in the context of the strong headwinds that the housing market is facing into: bearish expectations on price, stretched affordability and tightening credit conditions.

For example, the prospect of a 2-3 per cent reduction in stamp duty liability will hardly prompt people who expect further sharp falls in house prices to buy now.

What income tax relief was granted was just about enough to inflation- proof the system and fell well short of the reductions that some commentators advocated as a means of bolstering consumer confidence and boosting demand.

The Minister's unwillingness to do more is understandable. As things stand - on the basis of official forecasts of tax receipts - the target for 2008 is a budget deficit of almost 1 per cent of gross domestic product (GDP). Tax revenue forecasts however are notoriously unreliable.

Over the past 10 years, forecasting errors have reached as high as 9 per cent. Mostly these have been overshoots, but in 2001, the last year in which there was an economic slowdown comparable to that which is currently under way, taxes undershot the forecast by more than 8 per cent.

An undershoot of similar proportions next year would push the deficit close to the 3 per cent ceiling stipulated in the Stability and Growth Pact.

For reasons that have to do with our recent economic history, we are apt to overstate the significance of government budgets and at a time like the present, there is an inclination in public discourse to claim wonderful restorative powers for all sorts of budget proposals.

The reality is a good deal more prosaic. There are forces shaping Irish economic activity at the moment that are much stronger than any at the disposal of the Minister for Finance.

Probably the best and most enduring service that budgetary policy can render to the broader economy in the circumstances is summed up in two grey and boring words: expenditure control. Budget 2008 leaves a lot of room for improvement on that front.

Jim O'Leary is a senior fellow of the department of economics at NUI Maynooth