‘No need for a harsh December budget’

THERE is no need for Finance Minister Brian Cowen to introduce a harsh budget on December 5, according to economist John Beggs.

A report on the Irish Economy by AIB’sEconomic Research Unit is unambiguous.

The unit’s chief economist, John Beggs, states that while there have been big rises in Government spending over the past three years, controlling growth in current government expenditure in the years ahead is going to be very important if the public finances are to remain in good shape.

“This does not mean that a harsh 2008 budget is required. Indeed, despite some comments in the media to the contrary, the recently published Pre-Budget Outlook points to a prudent but not overly restrictive budget in 2008.

“The increase in gross current government spending is likely to be around 7%-8% in 2008. Cutbacks to planned capital spending are not envisaged, while there is scope to index all income tax bands and credits in line with inflation. There may be a small budget deficit in 2008 but this would be preferable to an unwarranted and inappropriately harsh budget,” he added.

The report by Mr Beggs, chief bond economist Oliver Mangan, senior economist Geraldine Concagh and senior economist Jenny Pollock, said: “The increase in gross current government spending is likely to be around 7%-8% in 2008, which is reasonably generous. Cutbacks to planned capital spending are not envisaged, with a rise of 10.5% likely to be provided for voted capital expenditure in 2008. There is scope to index all income tax bands and credits in line with inflation,” they add.

The quartet said that we are heading for a General Government surplus of €1.6 billion, or 0.9% of GDP, slightly below the budget target for a surplus of 1.2% of GDP.

“It would also represent the 10th General Government budget surplus in the past 11 years and result in a further decline in the Government debt/GDP ratio to around 24%.”

The AIB economists expect new house completions to fall by 35% between mid-2007 and end-2008, given the decline in housing registrations in the past year.

“Investment in new dwellings accounts for 11% of GDP. An additional negative effect is that there are associated transfer costs (2% of GDP) that move in a positively correlated way with housing activity. In total, then, a 35% fall in new housing output could take as much as 4.5 percentage points directly off real GDP in 2007/2008.”

The slowdown in housing activity will slow GDP growth to average 4.8% in 2007, from 5.7% last year.

“Apart from housing, though, most sectors of the economy will register stronger growth this year, with net exports contributing some 2% to GDP growth.”

They also believe employment in construction could contract by around 30,000. They forecast a jobless rate of 5.3% for next year and 5.7% in 2009, up from 4.4% and 4.6% in 2006 and 2007.