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Emmet Oliver: We're in a mess, but at least it's not getting any worse

THE new Government -- in power less than two months -- must still be wondering what kind of economy it has inherited.

On the one hand, it is an economy in horrendous shape, with a crippling deficit running at almost 11pc of GDP and an unemployment rate of 14.7pc, one of the highest in Europe.

On the other, the economy will actually grow this year -- albeit marginally -- and exports are very buoyant, with February's figures hitting a three-year high. Now, we are learning that tax receipts have also stabilised as recent increases kick in.

Clearly, the economy has bottomed out, but the Government must be wondering whether it will remain at rock bottom for a long period -- or will it actually start to slowly recover from the recession? Time will tell.

Economies can recover from deep recessions very rapidly -- the so-called V-shaped recovery. But equally they can recover more slowly, the so-called L-shaped recovery.

Having a major debt burden like Ireland would tend to make the second outcome more likely. But nothing is certain.

Yesterday's exchequer returns show that Irish consumers are doing what they have no choice over -- paying higher taxes.

But they're not spending. VAT receipts dropped by 3.1pc against government targets as retail sales remained sluggish.

The Government continues to hope that the declining spending patterns of consumers can be offset by a buoyant export sector.

This may happen, but domestic demand from ordinary people remains the largest part of the economy and unless this group recovers its confidence a fully fledged recovery will be difficult to achieve.

In terms of the public finances, Enda Kenny's government is certainly in a better place than the previous administration.

At least this Government can conceive of some level of growth. Its forecast that the economy will grow by just 0.75pc of GDP this year may actually prove to be a slightly conservative call. Other forecasters who said the economy would contract this year may find they are wide of the mark.

Several categories of tax are still producing surprises, with corporation tax still coming in ahead of expectations after three years.

However, the problem is that no matter how well corporation tax performs, the public finances will only be healed (on the revenue side) by strong income tax and VAT returns.

There are many risks to both of these. For the consumer, the cycle of interest rate rises from the ECB is likely to seriously curb spending in the second half of the year. For income tax, the continuing shedding of jobs is not helping.

In relation to corporation tax itself, the weak dollar is hurting exporters to the US, of which there are many.

The spending side of the Government's accounts seems to be more under control, with expenditure 1.8pc below target.

But nobody should get carried away with this as the State still borrowed €9.9bn in the first four months of 2010. This is because payments to Anglo Irish Bank and Irish Nationwide (via IOUs issued by the Government) are making their way through the system.

The IMF and EU will be broadly happy that the Government's targets are being met.

While slippage may yet appear and several technical factors have boosted the April numbers, there is still a sense that the public finances are at least not getting any worse.

Irish Independent