A “CREDIBLE, multi-year” plan to tackle the deficit in public finances and support the economy should include the broadening of the tax base, cuts in welfare payments and a new benchmarking exercise to reduce public sector wages, according to a new joint economic strategy document published by the three largest Irish stockbroking firms.
However, if the Government inflicts too high a tax burden on workers in next week’s emergency budget, it will prove counter-productive, economists from Davy, Goodbody and NCB warned.
The report, the result of an “unprecedented” collaboration between the three rival firms, emphasises that the Government should set transparent targets over a period of years, with current expenditure bearing the brunt of the adjustment.
Meanwhile, a new benchmarking exercise must be applied to the public sector, according to the report: “We must dispel the view that the focus on a reduction in the size of the public sector pay bill is a witch-hunt but rather a reflection of a changed labour market environment.”
A new analysis of public sector pay rates must “reflect the straitened times we’re in”, said Davy economist Rossa White. Next week’s budget should raise a net €2.5 billion from current expenditure and €1.5 billion from increased taxation, he added.
The report says that the size of the social welfare bill is such that payment rates “cannot be ignored” in the context of deflation as measured by the Consumer Price Index (CPI). Initial measures “must protect the most vulnerable”, it adds.
Turning to the troubled state of the Irish banks, analysts from the three firms said there was “a fairly high probability” that the Government would have to take equity stakes in the banks “in a matter of due course”.
So far, the Government’s has opted to buy €3.5 billion worth of preference shares in AIB and Bank of Ireland.
Goodbody banking analyst Eamonn Hughes said this €7 billion should be entirely rather than partly funded from the National Pension Reserve Fund, while support in the form of ordinary equity capital should be extended across the banking system, with the banking guarantee extended for at least 12 months.
Donal O’Mahony, an expert in bond markets at Davy, said Irish solvency risks had peaked in February and were now being “wildly exaggerated”.
Ireland should decrease its reliance on the commercial capital markets and instead tap its domestic investor base and borrow from the European Investment Bank (EIB), he said.
