GENEROUS 2007 GOI BUDGET HAS 2007 ELECTIONS IN MIND

1. On December 6, Finance Minister Brian Cowen presented the
Irish Government's budget for 2007, a generous package of tax
cuts and social spending increases that will likely enhance
the appeal of the governing Fianna Fail party ahead of
Ireland's 2007 general elections. The budget included
benefits for every segment of society, including: hikes in
social welfare payments for those in difficult economic
circumstances; increased state pensions for the elderly;
higher children's allowance payments for families; and,
mortgage interest tax credits for first-time home buyers.
Regarding tax cuts, the Government raised the income
threshold at which workers begin to pay taxes and also
brought down the top personal income tax rate from 42 to 41
percent -- with a promised additional 1 percent cut next year
if Fianna Fail is reelected. In crafting the budget,
Minister Cowen had the benefit of tax revenues for 2006 that
outstripped initial estimates by nearly euro 4 billion, as
well as projected robust economic growth of over 5 percent in


2007. Even with the planned 11.5 percent increase in
government spending in 2007, the Government expects to run a
budget surplus of 1.2 percent of GDP.



2. Comment: The danger is that the fiscal stimulus contained
in the 2007 budget may be excessive for an already buoyant
economy that saw inflation increase to over 3 percent this
past year. A further danger is that the Special Savings
Incentive Accounts (SSIAs, five-year private savings accounts
initiated in 2001-2002 with government matching
contributions) have begun to mature, making roughly euro 12
billion available to the accounts' holders and potentially
adding to inflationary pressures. Minster Cowen, however,
has dismissed concerns about economic overheating, and
political opposition parties have focused their criticism not
on the budget's possible expansionary effects, but rather on
the potential for ECB interest rate hikes to erode budgetary
benefits. For example, opposition politicians claim that the
ECB's 0.25 percent interest rate hike on December 7 and
expected further ECB hikes will cancel out the mortgage
interest tax credits that the budget offered first-time home
buyers. Notwithstanding the opposition's criticism, the
Irish media has reported an enthusiastic public reception for
the budget, a good omen for Fianna Fail's 2007 electoral
prospects.
FOLEY