Irish government heads for €800m surplus

Brian O’Mahony:

THE Government is heading for an €800 million budget surplus this year and not a €1.8 billion deficit as originally anticipated.

Bank of Ireland’s chief economist Dan McLaughlin predicts that this will be a boost to the Government in next year’s general election.

“This will allow the Government to deliver another expansionary budget for 2007,” he said.

Bank of Ireland has stuck to its growth forecast for the economy of 6% in 2006. It is also projecting a similar level of growth in 2007 which it says will be helped significantly as the SSIAs mature.

Overall Mr McLaughlin expects savers to spend up to €4 billion of their €16bn savings.

Of that €1.6bn will be splashed this year and the remainder in 2007. This will have the effect of cutting the savings ratio to 11% from 13% of income next year, but still leaves us with a very strong savings culture, “despite the popular myth” of us being total spendthrifts.

Mr McLaughlin predicts the strong economic growth will provide the Government with a massive boost to exchequer funding.

“The combination of strong economic growth and rising property values will result in a €1.5bn tax windfall for the authorities, leading to an €0.8bn General Government Surplus, as opposed to the €1bn deficit forecast in the Budget,” he said.

Speaking at the launch of the bank’s latest economic review, The Outlook, Trends in the Irish Economy, Dr McLaughlin said Irish people “are saving like Germans and spending like Americans” adding that younger people are spending while older people who have built up a good asset base are better able to save.

As this year unfolds the SSIAs will add to the rising level of consumer demand that has already entered a boom phase, he said.

This year the outlook for the economy is being dictated by a more coherent set of factors. “Last year the Irish economy was characterised by a dichotomy between the domestic economy and the external sector. The former boomed, driven by a significant rise in consumer spending and a surge in business spending on machinery and equipment, resulting in a 7.3% increase in domestic demand”.

Exports sagged and although they recovered somewhat annual export growth was less than 2%, he said. As a result overall GDP was just 4.7% in line with the previous year.

Bank of Ireland forecasts 6% Irish economic growth in 2006