ECB again warns Government not to cut taxes

 

THE European Central Bank has repeated its warning to the Government over plans to cut taxes in the coming Budget. Mr Manfred Kock, principle economist with the ECB said yesterday that unsustainable cyclical differences between member-states - such as Irish inflation, which is running at twice the European average - must be dealt with at the local level.

"From an economic point of view - but not a political one - this means that pro-cyclical policies should be avoided," he said. Mr Kock did not specifically mention tax cuts, but avoiding pro-cyclical policies implicitly includes not cutting taxes.

Defending the bank's stance Mr Kock said the primary responsibility of the ECB was the maintenance of price stability in the euro zone. This had been "unambiguously assigned" to the bank by the member-states including Ireland, said Mr Kock. He was addressing the Dublin Economic Workshop's annual conference in Kenmare at the weekend.

The ECB was not in a position to take action over difficulties that individual states might be experiencing, such as Irish inflation. "It must be taken locally," he said.

There was an onus on member-states to do what they could to avoid pro-cyclical actions to further the economic objectives of the euro zone, said Mr Kock.

Copies of Mr Kock's brief address were not available at the conference at his employer's insistence. The ECB economist was careful not to be drawn directly into saying that the Government should not cut taxes during the discussion that followed his talk.

Mr Jim Power, the chief economist with Bank of Ireland Treasury, was more direct. He told the conference that the Government should forgo any tax cuts in the Budget and put the money into childcare, healthcare, education and infrastructure. Childcare shortages and costs were now the biggest impediment to people joining the workforce, he said. He called for the abolition of mortgage interest relief, which was fuelling house prices.

Mr Power believed the ECB felt Ireland was not living up to its commitments. The bank had a mandate to ensure that inflation in the euro zone stayed within a zero to 2 per cent target range. It was perfectly entitled to ensure that the economic policies pursued by national governments were consistent with its definition of price stability, said Mr Power.

The Government should pursue its own tax policy and not cede control of one of its few remaining economic levers to the ECB, argued Mr Colin Hunt, economist with Goodbody Stockbrokers.

"Having already transferred monetary sovereignty, any move to surrender fiscal policy discretion would sabotage the current and prospective prosperity of the State," he said.

Mr Hunt was one of the few speakers to support tax cuts at the conference. Taxation changes in the next Budget should be aimed at increasing labour supply without adding unduly to inflation, he said. Mr Hunt suggested the introduction of a 15 per cent income tax rate which would increase the attractiveness of part-time work. Taxation changes that increased the efficiency of profit sharing should be examined, he said.

Other speakers suggested that the Government should go further and consider regaining control of monetary policy by leaving the euro zone.

"The economic arguments for such a move are undeniably strong," said Mr Kevin O'Rourke of Trinity College Dublin. It would allow the Government to raise interest rates and the pound to strengthen which would in turn bring down inflation. There would be a downside, he warned, as interest rates would rise to 9 per cent almost certainly bringing about a property crash and a slump in consumer demand.

There was no compelling evidence that Ireland should leave the euro now, but if the economy ran into trouble at a time when the euro was strong and European interest rates high then "withdrawal will start to seem much more tempting", he said.