Brian Cowen (Laois-Offaly, Fianna Fail)

I propose to take Questions Nos. 1 and 2 together.

At budget time, an Exchequer deficit of €4,866 million was projected for this year. This was based on an economic growth rate of 3% in GDP terms. However, a number of risks to the economic forecast were identified, including the possibility of a sharper slowdown in the US, the possibility of adverse exchange rate movements, the possibility that financial market difficulties could persist for longer than assumed and the possibility of a sharper contraction in new house building. It now appears that some of these risks have materialised and, in this regard, other economic commentators who produce forecasts on a more frequent basis have revised their forecasts downwards for growth in 2008. The market consensus is now for GDP growth of around 2.25% this year, compared with 3.25% at budget time. More modest growth would have implications for the evolution of the public finances.

At the end of the first quarter, an Exchequer deficit of €354 million was recorded. Overall tax receipts were €600 million, or 5.1%, behind target in the first three months of 2008. Over half of this shortfall was accounted for by the poor performance of capital gains tax and the bulk of the remainder accounted for by weaker than anticipated VAT receipts. Most of the other taxes were closer to what had been anticipated. However, income tax was above target and this is a welcome indicator of the resilience of the Irish economy. At this stage it is not expected that this tax shortfall, particularly in capital gains tax, will be recouped later in the year.

As regards expenditure, at the end of March total voted expenditure was broadly in line with the target, at €66 million, or 0.6%, under profile. Voted current expenditure was 1.4% below profile, while net voted capital expenditure was 4.3% above profile. The strength of capital expenditure is due mainly to better-than-anticipated progress on a range of key capital spending projects. This is real evidence of this Government's commitment to continued investment in economic and social development.

While our fiscal position may have weakened from that envisaged at budget time, it is important to point out that the current situation is manageable given the strong position of the public finances, including our low ratio of debt to GDP. As is usual, my Department will continue to monitor and report regularly on progress compared with the published profiles issued at the end of January.

The fundamentals of the Irish economy remain strong. This will help us to absorb the housing adjustment and external shocks so that our medium-term prospects are favourable. For instance, our public finances are sound with one of the lowest levels of debt in the euro area; our markets are flexible allowing us to respond efficiently to adverse developments; we have a dynamic and well educated labour force; we have a pro-business, outward-looking society; and the tax burden on both labour and capital is low.

The Government accepts that there can be no unnecessary loosening of fiscal policy and, in that context, the implementation of the national development plan remains a key priority. As regards current day-to-day expenditure, it is crucial that the agreed budget spending limits be adhered to this year. As I indicated at budget time, the rate of increase in current spending over the medium term must be managed carefully and kept within available resources. This Government intends to do just that.

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