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Brendan Keenan: There is good news, but we don't control our fate

ALWAYS look on the bright side of life, Monty Python sang, and they are doing their best in the Department of Finance.

The Monty Python character, Brian, was in a pretty difficult position at the time. So is the department, as it tries to find ways to meet the onerous terms of the bailout programme, and so is the Government, as it wrestles with the ever more hostile politics the programme will engender.

But they made the most of the fact that December was a better month for the public finances than they had expected. It was about €100m better, but for a curious reason.

The unexpected money came from capital gains tax, which is payable on profit made on the sale of assets -- things like property or shares -- up to the end of November.

This tax was increased from 25pc to 30pc in the Budget. It must be assumed that people who had assets showing a profit anticipated such an increase and decided to cash in before the Budget, thereby saving themselves some €5m.

That may make Finance Minister Michael Noonan think. If rumours of capital gains tax rises persuade people to sell assets now rather than hold onto them, providing much needed funds, perhaps he could try the same trick next year?

Next December is a very long way away, though. Much may be decided during 2012, for good or ill.

The only other bit of cheer in the Exchequer returns was the government's ability to meet its spending reductions -- even exceed them. Day-to-day spending, after collecting PRSI receipts, was down 1.6pc on 2010.

This was 1pc more than the new coalition had targeted in July. The ability to keep spending within the agreed limits contrasts with difficulties experienced in Greece and Portugal, and with the experience of the 1980s.

Having said that, most of the reduction in "spending" was due to higher-than-expected PRSI receipts. That in itself is a bit of a puzzle, given the fall in employment last year and pressures on pay. But it does mean that, despite the unpopular cuts, actual spending is hardly falling at all.

There are two obvious reasons for that. The growing debt from all the deficits saw interest costs rise by more than €1bn last year. That has to be found before considering how to achieve overall cuts.

Even worse is the annual cost of covering bank losses, mainly for Anglo and Irish Nationwide, which are being wound down but whose debts are being honoured. These amount to €3bn a year, which also has to be paid before overall cuts are made.

This helps explains why Ireland, despite the tough Budgets, is making such slow progress on its public finances. That unexpected windfall from capital gains means the general deficit used by the troika probably fell below the psychologically important 10pc of output (GDP) last year.

It was another little bit of cheer, but just a little bit. The tough 2012 Budget will bring the deficit only to 8.6pc of GDP -- well beyond what is sustainable. Were it not for the two years of bank costs, the deficit this year would by 5pc of GDP -- well on the way to sustainability.

This is the argument the government is making in Europe -- that it would be better for everyone if Ireland's efforts were producing greater results, because the cost of the bank rescue had been reduced or shared.

More progress on the public finances might even feed on itself, by giving people a bit more optimism and persuading them to spend or invest. The figures show that, despite an extra €2.5bn raised in income tax and the universal social charge (USC), tax revenues were €600m less than was hoped 12 months ago -- even after the €100m windfall.

The reason is that the economy did not do as well as was hoped. Consumer spending probably fell by around 3pc last year, rather than remaining flat. The numbers at work dropped by about 2pc, which was a major disappointment. All this contributed to VAT being 5pc less than forecast, and income taxes were meant to rise by €500m more than they did.

The troika did not demand corrective action, although the 2012 target should have been around 8pc of GDP. For the first half of 2011, it looked as if revenue targets might be met, but the international slowdown in the second half put paid to that. Ireland had met its spending commitments, and imposed the agreed new taxes, and the troika accepted that this was enough.

This was the sensible thing to do, but one cannot always rely on sense prevailing.

It may be more difficult this year, with the economy probably in decline as it enters 2012 and hopes resting on a better second half -- the opposite of 2011.

It may be more difficult for the troika to accept slippage in the first half, with so long to go to the 2013 Budget. There could be a mid-summer call for further taxes or spending cuts. However, the monthly targets from the department may well allow for weakness in the first half and growth in the second, to meet what is quite an ambitious forecast of 1.3pc expansion growth in output this year.

It all depends on the international situation. One can take that statement literally. Everything, not just the Irish public finances, depends on the international situation -- especially what happens to the euro.

At one end is the possibility that a convincing programme to hold the euro together leads to stronger economic growth in the second half and give a boost to Ireland's attempts to get more burden sharing on bank costs.

At the other, the forced breakdown of the single currency could lead, in the view of many, to the worst depression in 80 years. Best to look on the bright side until we find out.

Irish Independent