Budget will help consumers — but only just

BASED on the data published in last Saturday’s government White Paper on Receipts and Expenditure, the scene is set for a very generous Budget tomorrow.

The Department of Finance is forecasting that the opening general government surplus for 2007 will be over €4.4 billion or 2.3% of GDP. At the same time, the department estimates that the Exchequer balance will be in surplus at over €1bn in 2007.

In last year’s budget, the Minister for Finance spent over €1 billion extra on social inclusion measures. He is likely to add somewhat more to spending in 2007. On the taxes side, his various measures last year cost the Exchequer about €750 million. However, as a result of his various tax and spending proposals in the last budget, he estimated that he would get back almost €500m in additional tax revenue arising from the impetus that the budget would give to the economy.

His tax package in the forthcoming budget is likely to be greater than announced last year but he will also get more back as a result of the higher level of economic activity arising from the budgetary stimulus. When he has completed his budget proposals, it is expected that the minister will still have a general government surplus for 2007 of at least 1% of GDP.

The Budget will make an important contribution to the improvement in personal disposable income in 2007 at a time of rising interest rates.

Unfortunately for mortgage holders and potential buyers of property, the ECB will spoil the party on Thursday when it announces another interest rate hike of 0.25%. This will bring the official refinancing rate to 3.5%, up from 2% last December. There is also the risk of a further hike of 0.25% in early 2007.

The other bad news for consumers is that this latest interest rate hike will feed through into higher consumer prices in the months ahead. The Budget, on the other hand, is unlikely to add much to inflation in 2007. The feelgood factor from the Budget, therefore, may be relatively shortlived.

There are, of course, the pay provisions of the new national agreement to come. Overall, therefore, while personal disposable income should rise strongly in 2007, higher inflation and interest rates will take their toll.

This means consumers may feel that they are only a little better off as a result of these various measures. However, the Budget will at least help to offset part of the round of ECB interest rate increases. This will provide a degree of stability to the housing market.

The market will also have the benefit of knowing the Government’s intentions in relation to stamp duties after tomorrow’s budget. It has been claimed that doubts about the stamp duty tax regime had a serious effect on the housing market in recent months. However, is has also been the case that prices have risen too rapidly this year, adversely affecting buyers’ affordability.

It is important that the Budget provides clarity in relation to issues affecting the housing market. Construction plays such a large role in the economy that we cannot afford to experience any sudden corrections.

The indications are that the minister will provide more relief to first-time buyers through higher levels of mortgage interest relief. This should also provide some cushion against rising levels of mortgage costs.

In summary, therefore, the Budget will provide a boost to disposable incomes at a time of relatively high inflation and rising interest rates. Hopefully, it will also take uncertainty out of the market in relation to stamp duties.

More importantly, the Budget should be sufficiently generous to support potential homebuyers in 2007, offsetting the ECB’s efforts to tighten credit conditions.

John Beggs chief economist AIB Global Treasury