IBEC opposes major tax cuts in Budget as borrowing accelerates

The Irish Business and Employers Confederation has come out against large tax cuts in the next Budget as the latest official figures show that borrowing in the overheated economy is soaring.

Bank lending to people and business in the Republic increased in June by €1.24 billion (£908 million) to a total of €102 billion. This represents a year-on-year increase of 24.3 per cent. The annual growth rate has also accelerated from 23.9 per cent in May.

Mortgage lending grew as well, increasing by 22 per cent year-on-year, according to the Central Bank which yesterday published its monthly statistics for June.

IBEC said yesterday that the economy will grow by 10 per cent this year and 7 per cent for each of the two following years. The organisation said that in the current climate it "advocates prudence in the framing of next year's budget, which should avoid any further inflationary impetus".

Mr Brian Geoghegan, the organisation's director of economic affairs, said that taxes should be cut by the minimum required to hold the social partnership between employers and organised labour together.

IBEC's Quarterly Review of economic trends, also published yesterday, predicts that inflation will peak in excess of 6 per cent in November, the month before the Budget. The average for the year will be 5.2 per cent, according to Mr David Croughan, its chief economist. This is at the upper end of the revised range given last week by the Minister for Finance, Mr McCreevy. Inflation will start to fall towards the end of the year, as many of the once-off factors driving it at the moment, such as oil prices and the strength of sterling, will start to unwind, IBEC believes.

By November 2001, year-on-year inflation will have fallen to 2.8 per cent, but will still be one percentage point ahead of the European average, according to Mr Croughan. Unemployment will have fallen to 4 per cent at that stage, which will in effect be full employment, he said. IBEC is in the process of preparing its submission to the Government on the make up of the budget. "The size of the [tax] package and its structure has to take account of the state of the economy and underpin more stable rates of growth," said Mr Geoghegan.

The tax cuts promised under the last national wage agreement have already been delivered and it is arguable that the concessions agreed under its successor, the Partnership for Prosperity and Fairness, do not have to be implemented until the Budget after next, according to Mr Geoghegan. Mr Geoghegan said it would be unimaginable that the Government would not cut taxes but the measures should not be inflationary. "Anyone looking at our economy from the outside would actually say we need higher taxes," he said.

IBEC will push for cuts in indirect taxes for tactical reasons rather than reductions in income tax. Areas that could be looked at include VAT on e-commerce activities and tax relief on child care which will have the benefit of releasing more people into the workforce and countering wage inflation. The employer's group believes that provided the next Budget has only a minimal impact on inflation, the current crisis will resolve itself.

"If this thing is managed, we can get over this turbulence and move to a more sustainable level of growth," according to Mr Geoghegan.

Bloxham Stockbrokers said yesterday that the rate of growth in private sector credit should start to ease in the coming months as higher European interest rates start to have an impact. The European Central Bank will raise rates again in September because of rising European inflation and the weak euro, according to Mr Alan McQuaid of Bloxham.