Budget Perspectives 2003

Forecasting the Public Finances and the Macroeconomic Context for Budget 2003: by Adele Bergin, David Duffy, John Eakins,John & Daniel McCoy This first paper outlines the macroeconomic context in which the Budget is set and attempts to discern the appropriate fiscal stance for 2003. The authors see the medium-term outlook for the Irish economy as broadly favourable despite signifcant threats from sustained cost pressures and potential appreciation of the euro. The short-term prospects are, however, quite uncertain. They highlight the difficulties that have recently been encountered in predicting trends in the public finances with expenditures exceeding, and revenues falling short of, expected levels. They also emphasise the generally pro-cyclical character of Irish fiscal policy. In these circumstances, they advocate a cautious approach to the 2003 budget avoiding major innovations on either the revenue or expenditure side and aiming for a neutral budgetary stance. The UK Government's Approach to Setting Fiscal Policy Carl Emmerson, Christine FrayneThis paper outlines the experience in the UK with its Code of Fiscal Stability. This is encapsulated in two rules which are designed to help achieve high and stable levels of growth and employment. The golden rule enjoins Government to borrow only to finance investment and not consumption and the sustainable investment rule aims to keep net public sector debt at a stable and prudent level, currently 40 per cent. The authors discuss the experience with applying these rules and emphasise the problems that can be caused by forecasting errors. It will be interesting to hear the views of the Conference on the advisability of introducing such explicit rules into the Irish budgetary process, particularly since strict adherence to the rules of the EU's Stability and Growth Pact would lead to even more restrictive borrowing policies than under the UK system. The Distributive Impact of Budgetary Policy: A Medium-Term View by Tim Callan, Mary Keeney & John WalshIn the third paper, the authors use the ESRI's SWITCH model to assess the impact of tax and welfare policy on the Irish income disbution over the past 20 years or so. They show that a variety of factors have influenced this impact including macroeconomic circumstances such as the speed with which the economy is growing and the provisions of the various partnership agreements as well as political choices. They find that during the recent spurt in growth, budgetary policy acted to reinforce income gains for higher income groups while involving losses for those in lower income categories. The results for earlier periods were less clearcut. This paper shows the usefulness of having a resource like the SWITCH model which allows us to determine accurately what the distributional effects of policy are. Without it, policy-makers would be flying blind, unsure of who was being affected and to what extent.Setting the Appropriate Tax on Cigarettes in Ireland by David Madden In the fourth session, the author discusses the issues involved in the taxation of tobacco in general and in Ireland in particular. His paper compares current levels of taxation in Ireland with those in other European countries and goes on to identify the economic factors which should be taken into account when setting the appropriate level of taxation for tobacco. The paper draws an important distinction between the external and the internal costs of smoking. The former refers essentially to the costs imposed by smokers on others, while the latter refers to the costs smokers impose on themselves. If it can be shown that smokers do not take the internal costs fully into account, then considerably higher levels of taxation can be justified. The paper also discusses a variety of other topics, such as the choice between specific and ad valorem taxes and the role of smuggling in the tobacco market. There has been considerable discussion in the media recently about the advisability of a sharp increase in the tax on tobacco. This paper provides invaluable background analysis to this debate.