One part of the Government’s annual budget strategy has been to set credible spending and revenue targets, while aiming to beat its forecasts, and so exceed expectations. For 2015, this canny political approach has, so far, worked well. Half way through the financial year, the Government again finds itself in a position to revise its earlier budget forecasts - and do so for the second time this year. Revenue and spending returns to June show buoyant tax receipts, expenditure well under control, and a budget deficit that by year end (assuming no adverse external economic event occurs) may fall below 2 per cent. This is far lower than the initial 2.8 per cent of GDP estimate made last October.
The Government, as it considers its last budget before a general election, could not have hoped for a more favourable economic backdrop to those discussions. The public finances are steadily improving, unemployment has dropped below 10 per cent, economic growth remains strong and consumer confidence is high. However, much of the impressive domestic economic performance reflects favourable conditions abroad, in Ireland’s two major markets. There, strong US and UK economies have provided a major boost both to exports and growth. And, as the Exchequer returns showed, corporation taxes were some 11 per cent ahead of target in June.
Finance Minister Michael Noonan last April outlined the scope for tax and spending concessions in 2016. The latest Exchequer figures suggest he can again raise expectations of further giveaways, while still ensuring that deficit reduction continues. So far the Government has managed to under-promise and over-deliver, by beating its fiscal targets. Having done so quite successfully to date, the Government must now ensure that electoral considerations do not sway its financial judgment, and cause it to promise more than the economy can safely deliver.
That way risks a return to the politics of the past, where over-promising was followed by under-delivery, with disastrous economic consequences as we have seen.