Friends First warns against delays on public cutbacks

Wed, Nov 25, 2009, 00:00

MINISTER OF Finance Brian Lenihan cannot risk delaying implementing cuts in public spending, according to investment and insurance group Friends First.

The group’s chief economist, Jim Power, said stabilising public finances and stimulating growth must be the primary goals of Mr Lenihan as he prepares for next month’s budget.

Speaking at the publication of the Friends First Quarterly Economic Outlook, Mr Power claimed the only way to arrest the deterioration in public finances was through a combination of modest tax increases and “significant cutbacks” in expenditure. He said delaying cutbacks was “not an option and would lead to eventual bankruptcy”.

“It is just not possible to continue to add €495 million per week to the national debt. It is time that the so-called ‘social partners’ and Government got real about this fact,” said Mr Power.

“The economic and fiscal background against which budget 2010 is being presented is the most difficult in decades, but the Government owes it to us not to shirk its responsibility,” he added.

He said the Minister should consider boosting public finances through the introduction of a carbon tax which could raise over €450 million; changes to PRSI; and an increase in indirect taxes on petrol, alcohol and tobacco.

Mr Power also called for the broadening of the tax base to increase contributions from tax exiles and lower-paid workers.

“It is nice, but it is just not sustainable to have 50 per cent of workers paying no income tax at all,” he said.

While Mr Power highlighted possible tax increases, he insisted that the Government must also take steps to tackle public spending by cutting child benefit, reducing public sector pay and reducing the social welfare bill by 5 per cent.

“The reality is that the public sector pay and social welfare bills account for 71 per cent of gross current expenditure, so it is inevitable that, if spending is to be cut, these two areas will have to be addressed.”

Mr Power also recommended the introduction of new revenue-raising measures to boost consumer spending.

Among his suggestions were the introduction of a car scrappage scheme for cars over 10 years of age.

In relation to the property market, the Friend’s First economist is not predicting a recovery before 2011.

“Against a background of excess supply and constrained demand, it appears likely that house prices will fall further over the coming year.

“It is difficult to measure price changes in an illiquid market, but a further decline of up to 15 per cent appears likely, before the market is likely to bottom out in the second half of 2010,” Mr Power said.