McCreevy's prediction of small surplus has a hollow ring

CHARLIE McCREEVY is doggedly sticking to his guns that the country will run a small surplus this year.

His insistence has a hollow ring given the downward review of the economy and the implications it has for the nation's finances in his own department's Economic Review and Outlook, published yesterday.

Whatever about the minister's insistence that the country will have a surplus at year end, it is virtually impossible to find an economist, not even the most optimistic types, who share his view.

It may, however, be wrong to start running for the sack cloth and ashes.

And those predicting total economic mayhem may still be forced to eat humble pie by this time next year if economic growth starts to pick up.

There is no doubt, however, that looking ahead, the Government will face stark choices. And already signs are underway that the State is cutting back. The shedding of jobs in the health sector is only the beginning. It indicates, however, that the Government is taking the turn in fortunes seriously and that they are finally getting serious about pulling the Budget back into line.

It is unlikely at this late stage to be able to do enough to ensure that the Budget will not go into deficit, even if it is a lower figure of 500m euro and not the £1bn euro being talked about by the ESRI and other gloomier forecasters.

One of the difficulties is the uncertainty about the tax returns for this year and the extent to which the Government can cut day-to-day spending from 20% at present back to 14.5% for the year as a whole.

That implies a lot of cutbacks or else some more unanticipated windfalls. Whether they will come from at this stage is difficult apart from the 120 million euro from the sale of ACC Bank.

Even if the deficit hits 1 billion euro - as the ESRI forecast - it would still leave us with a deficit that is just 1% of GDP which is well off the 3% guideline laid down by Maastricht.

It is important in the interest of perspective also to point out that Germany, Portugal and others will be hard-pressed to keep their deficits within the set guidelines of the EU.

That point in itself demonstrates that the economy is not exactly sitting on the precipice as many now perceive it to be. In the case of the national finances, the good news is that perception is not everything and the figures are what count in the end.

In that context, too, it is interesting to note that Dan McLaughlin says the Government has been too pessimistic on its growth forecast and he still is clinging to the view, even it looks a tad desperate at this stage, that in 2002 the economy is still capable of expanding by 5% in GDP terms.

AIB in a recent review forecast real GDP of 5.5% for 2003 and 4% for this year and it is also sticking to its figures. Like Mr McLaughlin, it believes much of the dynamic, such as it is in the economy in the current year, will be led by pharmaceuticals and chemicals.

Growth will be export and not domestic driven, as consumer demand declines for the second year in a row. The export figures do not rely heavily on Viagra as some have suggested, so the export figures are not distorted.

So if the economy shows more resolve this year than the critics think, they will not be able to attribute the performance to the male potency pill, whose importance in stimulating economic growth is far less crucial than is its primary function.

At this juncture, the economy seems to have hit a point where there is a huge tension between the optimists and the

so-called realists who argue that with unemployment at 4.7% or 165,000 the rot has already set in and the situation will worsen.

If the sceptics are right, however, and the economy is in dire circumstances, then the jobless figures ought to be much worse.

Again, in terms of perspective, it is important to recall that as we moved into the late 1980s, the jobless figure was close to 300,000. It peaked, in fact, at 298,000.

Back then, the ESRI was projecting employment to go above 300,000 and to stay at that level until we reached the New Millennium. One of the difficulties now is trying to juggle the need for far tighter economic management by the State and the social partners overall while retaining our belief in the economy to deliver solid growth in the years ahead.

Nonetheless, the bottom line is that in two years the economy has slumped from growth of 9% on average down to as low as 3.6%, if the Government's figure proves true.

We were warned this would happen. What we did not anticipate was the slump in the US and the radical impact it would have here. Going forward, it will have a huge bearing on the outcome for us in the years ahead, given the

significant ties that bind the two at this stage.

Until things become clearer about the direction of the US the optimists and the pessimists will have to bide their time to see who will be proved right in the end. The more dispassionate still believe it is still too close to call.