Yesterday, Minister of Finance Brian Cowen delivered the draft 2008 budget in the Dáil (lower house of parliament), which contained few surprises. According to the Irish Times, Cowen noted that despite the current uncertainty in the global economy, the fundamentals of the Irish economy are still strong. The minister thus intends to "borrow modestly to invest ambitiously", and thereby keep the Irish economy going. With a slim majority of 86-80 in the Dáil, the coalition government of Taoiseach (Prime Minister) Bertie Ahern looks certain to push the draft budget through. The opposition parties are well aware of the less favourable economic background, and have therefore refrained from criticising Cowen’s overall aims; however, they have used the more stringent draft budget to launch scathing attacks on the recent wage increases for senior government officials, questioning the trustworthiness of the government.

Borrow More, Invest More?

The Fianna Fáil (FF)-led government has had a long tradition of offering “bumper” budgets, making the most of the country's enviable economic growth record of recent years. However, the 2008 budget was formulated against a much less favourable economic backdrop, with growth slowing and concern mounting that the housing market could suffer a sharp correction. The government has cut its 2007 GDP growth forecast to 4.75% (down from the 5.4% expected in the 2007 budget) and projects 2008 GDP growth at 3.0%. If realised, this would mark the Irish economy's weakest performance since 1993. Given this backdrop, Cowen announced that the government would increase borrowing in order to provide some stimulus to the economy. Specifically, he is targeting a general government deficit of 0.9% of GDP. Nevertheless, the expected slower growth in government receipts resulting from the economic slowdown means that total spending growth is forecast to be limited to 8.6% in 2008, compared to an increase of some 14% year-on-year (y/y) during the first 11 months of 2007. Cowen stressed that the National Development Plan, for which the budget plans 8.6 billion euro (US$12.5 billion), remains a top priority, so that government capital spending growth will be around 12% in 2008. Cowen stressed that the budget is a blend of sensible fiscal policy and increased awareness of environmental pressures; he further pledged that the budget would protect the less affluent in Irish society, provide improved and good-value public services, plus better public infrastructure.

The main areas targeted are as follows:

·                  Education: Government funds worth 9.3 billion euro have been earmarked for education policies—first and foremost for the accommodation of an additional 13,000 children expected to be enrolled in schools in 2008. Ninety-five million euro has been set aside in the draft for the construction and renovation of primary schools. Given the increase in immigration (since 2004 in particular) the education sector is said to have felt the pinch, with teachers’ associations demanding more state funding to cope with the increased demands. This funding ties in very well with the government's focus on boosting the construction sector, which is currently ailing but still accounts for almost a quarter of gross national output and employs about 13% of the total workforce.

·                  Environmental Services: The introduction of a new vehicle registration tax (VRT) for new cars, based on the level of carbon dioxide (CO2) emissions rather than engine size, carries the signature of the FF’s coalition partner, the Green party. The government is set to levy a VRT of between 14% and 36% from 1 July 2008 onwards, while annual car tax will rise by 9.3% for cars with engines of 2.5 litres or less, and by 11% for cars with engine sizes above that level. Cowen stressed that the measures are not meant to penalise drivers but rather help protect the environment.

·                  HousingMarket: Cowen's 2008 budget reveals changes to the property market tax regime, aimed at simplifying the system and making it fairer. The minister hopes that the reforms will support the rapidly slowing housing sector. Under the new system, purchasers of a property worth less than 1 million euro would pay no stamp duty on the first 125,000 euro of the purchase price, and would be charged 7% on the balance. For properties worth more than 1 million euro, stamp duty of 9% would be payable on the balance above 1 million euro. The measure harks back to the harsh criticism of opposition parties over the perceived negative impact of the reformed stamp duty on middle- and low-income earners in the housing market . Cowen intends to use the 1.7-billion-euro investment programme in public housing to build 9,000 social housing units, and an additional 5,500 new affordable homes. Indeed, there is concern that a sharp housing-market slowdown will hit the residential construction sector hard and significantly dampen overall growth.

·                  Transport: The 2008 draft budget foresees an extra 1 billion euro for improving public transport. Cowen stressed that investment in public transport was his main priority, and announced that around 2.7 billion euro would be spend on transport, 1.7 billion euro of which on road works. One of the government's aims is to improve the links between the capital, Dublin, and larger Irish cities by investing 600 million euro into an 87-kilometre dual carriageway. As for rail networks, two projects will get under way—the first phase of the construction of the Western Rail Corridor linking Galway to Athenry, and the Navan rail corridor linking Dunboyne to Dublin. Both the Irish rail and road networks are poorly developed, and in fact many rail lines were decommissioned in the 1930s. There are just under 2,000 kilometres (km) of track. The road network is relatively extensive, but until recently road quality was poor and there were very few multi-lane motorways. There are around 117,000 km of roads in total, including around 260 km of motorways.

Outlook and Implications

The draft budget has received a mixed response within and outside the Dáil, with anti-poverty organisations, teachers' and medical staff associations arguing that the measures do not go far enough. The infrastructure and construction measures have, though, largely been hailed by interest groups.

As the budget was delivered against a background of weakening economic growth rates, the opposition parties mostly refrained from criticising the government for "tightening its belt". Instead, the opposition Fine Gael (FG) and the Labour party have concentrated on the ailing revenues the government is currently taking in; the opposition parties claim that there is worse to come given the current course of the Ahern cabinet. Tax revenues in January-September 2007 stood at around 44.6 billion euro, 1.9 billion euro below target. Furthermore, November, which traditionally sees the highest government revenues, only brought in 9.7 billion euro rather than the hoped-for 10.9 billion, something blamed on the sharp fall in stamp-duty receipts.

The budget further raises questions about the capacity of the coalition government to deliver on its election promises. In the run-up to the May 2007 general election, FF promised sweeping tax reforms—cutting the top rate of tax by 1 percentage point to 40% and the bottom rate by 2 percentage points to 18%, and reducing Pay Related Social Insurance (PRSI) contributions—largely in an attempt to draw attention away from the scandal surrounding Ahern's personal finances. After the elections, the government published a paper entitled "A Fair Tax System", in which it said that fulfilment of the pledges was subject to economic conditions, something that would affect PRSI payments first and foremost. There were few significant tax changes made, apart from the reform of the property market tax regime.

For the opposition parties, the comparatively tighter budget offers another opportunity to try to derail the coalition government. During the new government’s six months in office, the Ahern government has witnessed two votes of no confidence , and opposition parties are using the budget to attack the cabinet over the recent wage increases for senior civil servants. Ahern in particular will have to tread carefully, as he was the subject of one of the two confidence votes, and he recently granted himself a pay rise as well.