Surplus - Danny McCoy
After a year of extraordinary uncertainty for the Irish economy, Budget 2002 still managed to surprise with a surplus being returned on the strength of finding some money under the mattress.
The opening position for next year's Exchequer borrowing requirement was set out as a deficit of €516 million (£406 million). As it transpires loose change at the Central Bank, courtesy of the euro changeover, turned up nearly €500 million for next year which, in addition to rises in other areas, gives a projected surplus of €170 million.
This was not achieved by a miserly approach on income taxes or welfare payments either. Some leaning on the little understood capital services redemption fund for €500 million, bringing forward of corporation tax payments giving €179 million and raiding the social insurance fund for more than €635 million all contributed. The munificence of Budget 2001 was repeated in generous welfare rate rises while tax reduction was less spectacular.
This still amounts to quite a stimulatory Budget. The increases in tax bands and credits, along with rising welfare payments will provide an additional €1.6 billion next year, which goes beyond what would have been necessary to provide indexation to keep the impact broadly neutral. The advantage of the move to tax credits in recent years really shows this time in facilitating the aim of directing resources at the lower paid without entailing excessive budgetary cost.
The economic growth projection underlying this Budget is quite optimistic at 3.9 per cent in real GDP terms, given the acknowledged uncertainty that still faces the global economy. While the Budget delivers a surplus in the Exchequer position, it is reducing significantly the surplus on the general Government balanced used to judge our fiscal stability by the European Union.
The position here is still a lot better than our European partners and we are unlikely to see a repeat of the dispute with the EU Commission that arose last time. But the others will admire the ingenuity of searching for that loose change at an opportune time.
Danny McCoy is an economist at the Economic and Social Research Institute.
Legacy - Tony Leddin
When Charlie McCreevy presented his first budget on December 3rd, 1997, he asked that his performance be judged on all five, rather than any one. As he put it, the days of a Judge Dredd retrenchment or a benevolent Santa Claus were gone. What was required was a longer-term fiscal strategy designed to sustain economic growth.
Now that the Minister has delivered his fifth, and final, budget of this term, what has been his legacy?
There were two aspects to the McCreevy strategy. First, on the revenue side, taxation was used to increase the incentive to work and thereby encourage more people into the labour force. Lower tax rates, increased allowances, a widening of the tax bands and the "individualisation policy" meant that, for more people, obtaining a job became an attractive proposition. This partly explains the 15 per cent rise in the labour force since 1997.
The tax cuts also underpinned the national wage agreements, which led to moderate pay rises, industrial peace and improved competitiveness. The labour cost of producing a unit of output declined by 35 per cent during Mr McCreevy's tenure. Three-hundred-and-fourteen thousand jobs were created and the unemployment rate fell below 4 per cent.
The second dimension to the strategy relates to capital expenditure. This type of expenditure increases the physical and human capital stock and the productive capacity of the economy. The measures in yesterday's Budget mean capital spending has been increased by 237 per cent since 1997. Within this, capital spending on education has risen by 271 per cent, health by 191 per cent and the environment by 182 per cent. In contrast, current expenditure rose by 52 per cent. Public sector pay and the pensions bill rose by 54 per cent.
Despite the tax cuts and expenditure increases, the Minister could show a substantial surplus in all years including 2002. The conjuring trick in 2002 is to finance the tax and spending measures with a €610 million windfall from the Central Bank and a withdrawal from the social insurance fund.
The really innovative part, however, is that the "supply-side measures" in the five budgets partly offset the expansionary demand-side effects. The result, at least until mid-2000, was non-inflationary economic growth.
Dr Anthony Leddin is senior lecturer in economics, University of Limerick.
Outlook - Dan McLaughlin
Fiscal policy has little impact on demand or prices in Ireland, as befits a small open economy, and any analysis of the likely impact of the Budget has also to be tempered by the fact that the Exchequer outturn in 2002 could well be very different from that projected by the Minister for Finance. Last year, for example, total revenue emerged an extraordinary £1.9 billion below forecast, whereas the two preceding years had seen huge tax overshoots. On that basis, the Exchequer could well end 2002 with a much larger surplus than the £170 million forecast or indeed a large deficit.
I suspect the former will be the case as the GDP growth forecast underpinning the tax estimates may turn out to be too low. Ireland's potential growth rate is also difficult to pin down, as migration and female participation is so flexible here, so adjusting the Budget for the economic cycle is open to interpretation.
Tax revenue slows in a downturn and spending on unemployment benefit increases, so the deceleration in Irish growth will naturally reduce any Exchequer surplus, but it is a problem to disentangle how much of the deterioration is cyclical and how much is due to discretionary budget spending. For what it is worth the Department believes the 2002 Budget is neutral in demand terms, adjusting for the cycle, so at least we will all be spared the farce of an EU reprimand from Mr Solbes.
In fact, most analysis has concluded that Irish policy is, if anything pro-cyclical. In other words the Budget adds to spending in a boom and deflates it in a downturn, which is hardly surprising in that buoyant tax receipts leads to media headlines to the effect that the Minister can "afford" tax cuts. On that basis, the Budget is a break from tradition. The increases in indirect taxes will add 0.9 of a percentage to inflation but the impact is split between December and March, as the VAT rise will be delayed.
The clever use of off-balance sheet sources of revenue (the Central Bank surplus, dipping into the social insurance fund) hides a deterioration in the underlying budgetary position, which will be problematical for Mr McCreevy's successor in 2003 (if indeed there is one).
Dr Dan McLaughlin is chief economist, Bank of Ireland.
Compromise - Brendan Walsh
This was the year when things began to come unstuck. By the third quarter, a dramatic slow-down in Ireland's growth rate was evident. The first rise in the numbers unemployed in over five years was recorded. The tax buoyancy projected in last year's budget failed to materialise and Mr McCreevy's grand vision of an economy spurred to ever-greater heights by self-financing tax cuts faded as the fiscal surplus shrank at a pace no one anticipated.
Overruns on expenditure and shortfalls in revenue reduced the Budget surplus by almost 3 per cent of GDP. This was the year when reality reasserted itself and forced him to choose between the items on his wish list.
His response is a clever compromise. Further reductions in income tax rates and full individualisation of the bands have been sacrificed. There will be little growth in inflation-adjusted capital spending, while current spending continues to escalate at a rate predicated on the boom of the 1990s rather than on the more sombre prospects facing the economy. The commitment to pension pre-funding has been honoured and borrowing averted by creative accounting relating to the Central Bank and an optimistic projection of tax revenue for the year ahead. This will defuse the criticism levelled at the Minister in the run-up to the Budget.
This time last year I was willing to give Mr McCreevey's expansionary budget the benefit of the doubt, arguing that the large stimulus it contained might be appropriate if it kicked in as recessionary forces intensified. But taking the last two budgets together it is harder to defend his timing.
Much of the stimulus in last year's budget fuelled larger wage bills, leaving too little room for manoeuvre this year as the economy faces the most uncertain prospect for almost a decade. With the benefit of hindsight, it is likely Mr McCreevey's fiscal policies will have been pro-cyclical.
The failure to accelerate the capital programme as the growth rate faltered is particularly disappointing. That he stopped some ways short of the promised land of tax reform outlined three years ago suggests he never really believed the supply-side rhetoric used to justify it then. It is hard to avoid concluding that the Minister dropped the baton in his fifth budget.
Brendan Walsh is professor of economics at University College Dublin