Government's forecast is at odds with expert opinion that recession will continue into 2010, writes GARRET FITZGERALD
ACCORDING TO the Government, the effect of the Budget was to reduce the expected level of exchequer borrowing in 2009 from €14.6 billion to €13.4 billion, which would yield an expected general government deficit of €12.2 billion, or 6.5 per cent of GDP. Under EU rules, which we helped to devise during the second-last Irish presidency, this latter figure should not have exceeded €5.6 billion, or 3 per cent of GDP.
So the Government have settled for a 2009 deficit that they themselves say will be over twice the maximum figure to which we are committed as a member of the euro zone, and they have chosen to reduce borrowing by only 8 per cent next year.
How at this rate do they expect to get the deficit down to less than 3 per cent by 2011, a target to which they committed themselves in the Budget?
A small part of the answer lies in the fact that we already benefit from the fact that our general government deficit - the criteria used by the EU to calculate the 3 per cent borrowing limit - runs about €1.2 billion below our exchequer borrowing figure and the Department of Finance expects that, to our advantage, this differential will more than double between 2009 and 2011. That would reduce our problem by two-thirds of one per cent.
However, this could be more than offset by the fact that the 2009 outcome predicted in the Budget may well turn out to be too optimistic.
First of all, as the Budget was in October, the Government had to base its prediction of this year's outturn on 10 months of revenue figures - at a time when each month had shown a deterioration in revenue - with no indication of any easing off in this process.
The Government's prediction will face its first test at the end of this month, as self-employed people pay their annual tax bills in November. Moreover, in addition to doubts about this year's outturn as a basis for next year's revenue, the Department of Finance has calculated its revenue figure for 2009 upon the assumption that our national output will fall by only 1 per cent next year.
But even the Central Bank has projected a bigger decline than that next year, and other forecasts have suggested the drop in GNP might be as large as 4 per cent in 2009.
Moreover, this assumption that as early as 2010, national output will rise by as much as 2.4 per cent, also seems optimistic. Since the Budget was announced, a growing volume of opinion here and abroad has emerged, suggesting that this recession may continue well into 2010.
All in all, we should not be surprised if the budgetary gap to be filled between 2009 and 2011 turns out to be a good deal larger than the Budget suggested.
If so, the Government's expectation that it will need to find only a further €2.1 billion in cuts or tax increases in the Budgets for 2010 and 2011 may prove to be quite inadequate. The gap to be thus filled could easily rise to double this figure.
I feel that the Government may regret that in the recent Budget it failed to make bigger inroads into the deficit and borrowing. This failure will build up more problems for them in the next two budgets, diminishing their capacity to recover political ground in advance of the general election due in mid-2012.
But it is also clear that they have failed to persuade the electorate of the scale of the crisis the country faces. Last Friday's TNS/MRBI poll in The Irish Times showed public opinion has still not woken up to the massive scale of the financial problem we face.
The fact that no less than 63 per cent of those polled felt that the Budget was too tough demonstrates a terrifying lack of grasp of just where we now find ourselves. It also suggests the Government's own long delay in recognising the emergence of this crisis, and its hesitations more recently about conveying its gravity to the public, has had a damaging effect on public opinion.
What was particularly notable about the response to this poll question was the contrast between the reactions of working class and farming respondents, over 70 per cent of whom thought the Budget was too tough and the smaller proportion (51 per cent) of middle class people who expressed this view.
The next question asked if people felt that the Government should place more emphasis on spending cuts or on tax increases.
In response to this question, only 32 per cent said they favoured tax increases, but when this issue was then re-formulated in a more concrete way - "Would you be prepared to pay more in taxation to ensure that there is no reduction in public services" - a much more balanced response emerged, with 43 per cent saying they would be prepared to pay more taxes, and only 49 per cent taking the opposite view.
It was also very interesting that those most likely to lose if taxes were increased - namely the middle class - favoured higher taxation as against cuts in public services by a majority of 55 per cent to 39 per cent, whereas working class voters, who would suffer more from public service cuts and probably less from tax increases, took the opposite position - only 37 per cent saying they would be prepared to accept tax increases, and 54 per cent rejecting such an approach.