Cautious Cowen has a unique opportunity

NEXT Wednesday Finance Minister Brian Cowen will present his last Budget before next year’s General Election.

His task will be a pleasant one, as he has huge resources at his disposal and his only real issue is how he will dish it out. In fact, it is certainly the case that never before has an Irish finance minister had so many resources at his disposal.

One thing Mr Cowen should be mindful of is the fact that being in such a strong financial position is not par for the course and he definitely finds himself in quite a unique situation. Consequently, it is incumbent on him to make sure that he uses the opportunity wisely.

A wise use of resources should not be defined as simply getting his party back into government, but rather to use the unique opportunity presented to him in a manner that would make a real difference to the lives of Irish people and to the structures of the Irish economy.

Lest one get carried away, it is important to bear in mind that no single Budget can change the world, but the level of resources available to Mr Cowen this year is significant and might never be repeated.

The plentiful bounty at his disposal is primarily due to the fact that the strongly growing Irish economy is generating lots of tax revenues. After all, every time we move we get taxed, and there is certainly lots of movement in the Irish economy, so lots of tax revenues are being generated. One of the biggest drivers of the tax take is clearly the housing market and related activities.

Housing-related activity is driving income tax, VAT, capital gains tax and stamp duties. The problem of course is that the housing market will not continue to generate such buoyant tax revenues forever, and it is possible 2006 will represent the peak of the housing cycle.

At the broader level of the economy, it is also not likely that such buoyant levels of economic activity will last forever. The frailty of the global economic cycle is quite obvious at the moment.

On Tuesday, US Federal Reserve chairman Ben Bernanke warned that a worse-than-expected US housing slump could further complicate things for an economy already experiencing a general slowdown.

In my view, the US housing market and its potential impact on the US economy is the biggest risk for Ireland and the global economy over the next couple of years. Were the US housing market to slump, it would pull the US economy down very sharply, with consequent negative implications for the dollar and, by definition, for the rest of us.

Of course none of this negative stuff might come to pass and the Irish economy could continue to generate buoyant growth and plentiful tax revenues indefinitely. However, it would be foolish for any finance minister to operate on this basis.

Economic cycles are called cycles because they actually do cycle, and it is always wise to be prepared for a negative eventuality. Consequently, it is incumbent on Mr Cowen to ensure he spends the money wisely next week and that, come this time next year, we are all better of as a result of his largesse.

The problem with public spending is that once committed to, it becomes embedded in the permanent cost base of the economy and can prove impossible to reverse.

Spending and taxation should be used to make a real and lasting positive impact on people’s lives, and enhance the efficiency of the economy. This will ensure the generation of the growth and tax revenues that are essential to fund and further the social agenda.

The advice to Mr Cowen next week has to be to spend and tax wisely and ensure that the longer-term legacy of Budget 2007 is a positive one.