ESRI calls for more tax cuts next year

The government has been urged to continue to reduce taxes in next year's budget. The advice, contained in the ESRI's latest Quarterly Economic Commentary, runs contrary to that given by the European Commission, the European Monetary Institute (EMI) and the OECD, which have warned Ireland of the need to contain inflationary pressures by adopting a tight Budget policy.

But the ESRI believes that the chief foreseeable danger to Ireland's economic performance would be if pay settlements were to get seriously out of control.

"To minimise this danger, it would appear more important that the spirit of Partnership 2000 is maintained through continued moderate reductions in effective rates of direct taxation than that the fiscal stance is significantly tightened, as some external agencies have advised," it says.

Further evidence of the pressure that Ireland is under to run a tight budget was produced yesterday by French Finance Minister, Mr Dominique Strauss-Kahn. He said that France wanted a new euro council of finance ministers to look at how budget policy could be used to prevent economies overheating.

"Once you have a common monetary policy, the differentiation in the policy mix must be made through budgetary policy," Mr Strauss-Kahn said. "The main tool will be budget policy."

The ESRI says fiscal responsibility remains necessary in its own right and notes that debt reduction is very appropriate in the current period of tax buoyancy. But it says this should be seen as an investment in future living standards rather than as a response to temporary inflationary pressures.

"Maintaining a climate where moderation in basic pay increases can continue is more important to future job prospects than any attempt to tighten fiscal policy as an anti-inflationary measure."

It believes that in an economy as open as Ireland's, fiscal tightening would impact primarily on the balance of payments, rather than on the rate of price inflation.

The ESRI sees the outlook for inflation as the principal uncertainty facing the economy in 1998. However, it expects the Irish economy to enter Economic and Monetary Union (EMU) next year with growth still strong, unemployment still falling and inflation at a tolerable level.

Past experience suggests that the sharp depreciation in the trade-weighted value of the pound, which is currently 10 per cent below its level in the first quarter of 1997, should result in substantial price inflation in 1998 and 1999, the ESRI says.

But factors such as competitive pressures in the retail industry, a perception that the extreme strength of sterling is temporary, the recent revaluation of the pound and the weakness of many commodity prices, including oil, should help offset price pressures.

The ESRI estimates that inflation will peak at about 3 per cent in the second half of 1998, increasing by an annual average of 2.7 per cent this year and next year.

It says some reduction in the rate of growth is likely because of the impact of the Asian crisis on export growth. Growing constraints, including labour shortages, may also restrict output in some industrial and service sectors.

The ESRI is forecasting real GNP growth of nearly 6.75 per cent, down from an estimated 8.25 per cent this year. But growth will remain high by historical standards and should generate a significant further increase in employment.

The ESRI believes the jobless rate is set to fall further in 1998, dipping below 10 per cent to about 8 per cent by the end of the year, while the numbers at work are forecast to rise by 51,000 or 3.75 per cent.

It says public finances should strengthen further in response to buoyant domestic demand with the general Government surplus likely to approach 1.5 per cent of GDP.