Ireland-Exchequer Deficit Blues

Ireland will have a deficit of €1.62 billion this year, compared with an Oct. 2 forecast of €1 billion, according to the Department of Finance. This contrasts with a budget surplus of €4 billion just a year ago.

The Government must bear much of the responsibility for the deterioration in the public finances. In 2007 there has been a 13% growth in the rate of public expenditure as FF and the PDs wooed the electorate. This paid political dividends as the FF/PD government duly returned to power with the support of the Greens and Independents. Already many of the FF election promises have been binned. Prior to the 2002 General Election the FF/PD government allowed public expenditure to escalate out of control. In the immediate aftermath of the 2002 General Election FF Finance Minister Charlie McCreevy set about reigning in public expenditure and introduced a raft of stealth taxes. He failed to index income tax allowances thereby pushing large numbers of PAYE tax payers onto the higher tax rate. Prior to the 2002 Election FF and PD Ministers denied that there would be public expenditure cuts.

A similar scenario to 2002 has now unfolded in 2007. The Government will once more cut public expenditure and introduce stealth taxes. Over the next 2/3 years it will build up a a financial war chest. As the anticipated 2012 General Election approaches public expenditure will once more mushroom. Brian Cowen and Dermot Ahern -during the 2007 election campaign -strongly berated Richard Bruton(FG) Finance Spokesman when Bruton drew attention to both waste and rocketing government expenditure. He can now claim retrospective vindication. Many in the media have spoken of Cowen in messianic terms.

In less than two years the ECB has raised Euro interest rates by 2%. This has knocked some of the fizz out of the housing market. Stamp Duty receipts have slumped and lay offs in the building industry are increasing rapidly. This crisis has been exacerbated by the failure of the Government to reform stamp duty. House prices are falling and negative equity looms on the horizon. Mortgage debt in Ireland is now €136 billion. There is also an astronomical level of credit card debt.

New house starts may fall to c 55,000 in 2008. The huge slump in property tax receipts looks set to continue in 2008. In addition a tightening up of bank/building society lending policies will further restrict the amount of credit available to house buyers. For too long the government has been over reliant on taxes from the property market to boost public expenditure. One eighth of the workforce is employed in construction. 20% of private sector workforce depends on construction.

Rising energy costs will reduce economic growth.This has implications for unemployment which is already rising. Rising unemployment will further depress tax receipts and damage consumer confidence.

For FG and Labour this was the election to lose.