Spending must be cut, say economists

TOP economists warn the Government will have no option but to cut spending next year if it is to keep borrowing in check.

With tax revenue growing at about 8%, the reality is that to spend more than that the Government will have no option but to borrow excessively next year and risk breaching EU guidelines.

Current spending is running at close to 20% instead of the 14.5% target for this year, while tax revenue remains way off target.

The comments follow publication of the Government’s mid-term Economic Review and Outlook, which shows further deterioration in the national finances and in the growth prospects for 2002.

The government says it will still run a surplus of about 100m for the year.

Most economists think that figure is romantic and the chief economist of Bank of Ireland Dr Dan McLaughlin, who is still a strong believer in the underlying strength of the economy, thinks the overall deficit this year could be up to 500m.

He rejects the more pessimistic view that we are heading for an overall deficit of £1bn as some forecasting bodies have argued.

In its review of the year, the Government has revised some of its key figures pointing out they will not meet Budget projections.

Some of the key figures are as follows:

Growth in GDP terms will be 3.6% for 2002 and not the Budget figure of 3.9%.

Inflation will come in at 4.5% and not 4.3%.

Consumer spending will be 4.3% and not 5.7% as budgeted.

However the figures show no change in the projected unemployment figure. It is still at 4.7% for the year but that is nearly 1% higher than the 2001 figure of 3.9% for last year.

AIB’s chief bond economist Oliver Mangan said the Government will have no choice but to draw in its horns next year if it is to keep its finances in order.

Fine Gael’s finance spokesman Richard Bruton said the publication of the mid-term review “provide further evidence that the public were conned into believing that the budget presented earlier in the year was built on solid foundations”.

Promises about spending cutbacks have been broken indiscriminately while the Government “is wringing its hands about price inflation running at twice the rate of the rest of Europe but offering no policies to tackle the problem,” he said.

IBEC said the review has put in perspective the fundamental issues facing the economy this year and next. The dip in growth from 10.4% two years ago to just 3% this year is a sharp reminder that the boom days are over.

Aebhric McGibney, senior economist with the employer body, said the rate of growth in current spending had to be brought into line with nominal growth in the economy “to provide funds to tackle the infrastructure deficit”.