Finance Ministers back members' right to set tax

A recommendation by the European Commission that Ireland's 1999 Budget should not contain "any further tax cuts" has been rejected by Finance Ministers in their substantial revisions of the Union's broad economic guidelines for next year. The Ministers subsequently approved the revised text.

The tussle between the Commission and the Ministers over country-specific recommendations in the guidelines published last month reflects a symbolic drawing of a line in the sand on the scope of the enhanced economic co-operation foreseen with the advent of the euro.

"It is clearly the job of Ministers of Finance in every country to decide on tax policy, " the Minister for Finance, Mr McCreevy said yesterday. "That is quite clear and without ambiguity," he said.

The revision of the guidelines was regretted by the Economic Affairs Commissioner, Mr Yves Thibault de Silguy, whose spokesman pointed out that the country-specific recommendations were included for the first time at the request of ministers. The Dutch Minister, Mr Gerrit Zalm, expressed concern at what he saw as a failure of nerve by Ministers at a time when members states should be prepared to discuss each others' performance candidly as partners.

The new guidelines do however acknowledge Ireland's potential difficulties with inflation and reiterate the injunction of the Monetary Committee at the time of the devaluation in March, when it insisted that unexpected tax revenues in 1998 should be devoted to debt reduction rather that tax cuts.

"Moreover a tight fiscal stance is required in Ireland to reduce the risk of overheating," the new guidelines say. "It is noted that the authorities are resolved to propose a budget for 1999 having as its primary objective the continuation of low inflation in Ireland."

Irish officials are sceptical, seeing the French positon as a way of justifying an ECB interest rate strategy based on the interests of the big countries, without sufficient concern of the needs of the faster-growing peripheral countries.

A senior Finance source stressed that the revised text does not represent any dilution of the Government's commitment to an anti-inflationary strategy, but that the Commission's position reflected only one side of the budget equation.

The implication is clear - if Mr McCreevy wants to cut taxes, the Budget will have to contain exceptionally tough expenditure constraints.

The row reflects different perspectives on the extent of economic collaboration envisaged for the post-euro period. The French see it as the first step to collective EU "economic governance".

But, one way or another, Ireland and its 10 euro-participating partners took a major symbolic step towards the collective management of their economies with the first meeting of the new euro-11 committee comprised of the Finance Ministers of the 11 member states who will be founders of the euro.

The French Finance Minister, Mr Dominique Strauss-Kahn, cited Ireland's inflation predicament to explain his far-reaching perspective on the new realities. The interest rate strategy of the European Central Bank (ECB) was necessarily going to be unable to reflect the priorities of countries whose cycles were out of synchronisation with the major economies, he said.