A tough Budget in December is now virtually certain after Tánaiste and Minister for Finance Brian Cowen acknowledged that the economy has passed a "turning point" and conceded that the rate of economic growth will slow appreciably in the next three years.
Slower economic growth and a much bigger bill for maintaining existing public services point to a difficult negotiation between Mr Cowen and his Government colleagues on any new spending measures in the run-up to Budget day on December 5th.
Mr Cowen has revised downwards his forecast growth rate for 2008 to 3 per cent. Moreover, the pace of economic expansion is forecast to remain relatively subdued over the next three years, averaging 3.25 per cent annually in the three years to 2010.
Mr Cowen's downward revision of the growth rate led the Opposition to accuse him of economic mismanagement and spurious election promises. The Programme for Government was predicated on an average annual expansion of 4.5 per cent in the next five years.
The statement was his first in a reformed Budget process in which all new spending and revenue- raising measures will be published for the first time on Budget Day. Unlike the traditional budget Estimates package, now consigned to history, the statement outlined only the increase in expenditure required to maintain public services at their current level.
With taxation revenue this year already lower than forecast, the statement was produced against the backdrop of lower construction sector activity, higher interest rates and oil prices and a marked appreciation in the euro-dollar exchange rate.
Day-to-day Government spending is set to increase by 13 per cent this year. The Minister is already committed to curbing this growth rate to the 7 per cent to 8 per cent range in 2008.
With rising bills for current services pre-empting almost five percentage points of the targeted growth, there is very limited scope for improvements in the reach or quality of public services next year.
In addition, slower economic growth will act as a brake on the rate of increase in tax revenues next year. This virtually rules out the introduction of any tax cuts, including the one percentage point cut in the top rate of income tax - 41 per cent - which was mooted last year.
"I think it is fair to say that 2007 represents a turning point for the Irish economy," Mr Cowen said.
"While the economy has performed reasonably well in the first half this year, the current indications are that the short- to medium-term outlook has changed vis-à-vis that envisaged on Budget Day."
Maintaining the existing level of public services during 2008 will cost an additional €2.3 billion, raising gross current public spending to almost €51 billion next year, Mr Cowen said. This represents a current public spending increase of 4.8 per cent simply to continue existing levels of public service provision in the year ahead.
Mr Cowen was not discommoded by the deceleration in the growth rate. "We're not heading into a deflationary situation. No one is suggesting we're on our uppers," he said.
He emphasised the need for calmness and prudence, pointing out that "the first job is to consolidate and protect the improvements already made".
Asked whether his downward revision meant that initiatives set out in the Programme for Government would have to be curtailed, Mr Cowen held out the possibility that there would be a return to higher growth rates later in the five-year period.
Fine Gael finance spokesman Richard Bruton derided as a "pipedream" Fianna Fáil's promises before the general election.
Labour's finance spokeswoman Joan Burton said the outlook proved that the era of the pre-election splurge was over. "What will Fianna Fáil do? Will they once again cut home help hours, causing hugely expensive bottlenecks in the acute hospital services?"
Sinn Féin spokesman Arthur Morgan said the document proved that the Government could not now afford to cut taxes and maintain or improve public services.