EU will frown on inflationary tax cuts

What are we to make of the warnings from the EU Commission to Ireland not to cut tax in the 1999 Budget? The economic boffins in Brussels are in no doubt that the strength of the economy means that any further reductions in taxation would only add fuel to the inflationary fire. But the Government has already committed to further reductions in taxation as part of its Programme for Government and also as part of the Programme 2000 agreement with the other social partners. And trade union leaders have indicated that they expect Mr McCreevy to deliver, or else!

With employees already rumbling about how the rising rate of inflation and the steep rise in house prices is eroding the purchasing power of their earnings, Mr McCreevy is in a difficult position. This is even more the case as the Government in its programme promised to concentrate tax reductions on reducing income tax rates.

This gives greater proportionate benefit to the better off and meant that Mr McCreevy's first Budget got a lukewarm reception from the trade union movement, which pointed out that it delivered little enough for the lower paid.

The Commission or our EU partners have no veto to make Mr McCreevy refrain from cutting taxes. With the exchequer finances in a strong position, we are well within the budgetary guidelines set down for monetary union memberstates in the stability pact.

But the budgets of all those joining monetary union are a "matter of common interest" to use the EU jargon to all the rest. How this monitoring will develop and the extent of the pressure which the group can bring to bear on an individual member-state remains to be seen. After all, the last thing that the Government will want is to enter monetary union next January with criticism from our EU partners about the 1999 Budget ringing in our ears.

Perhaps the Government could sell a tax-reduction package as being part of a reform of the taxation structure, rather than an inflationary giveaway? To do so, it would have to change its strategy from the approach of cutting income tax rates to a package which concentrated on adjusting bands and allowances and addressing the key structural problems in the tax system. Such a strategy might please the unions, but where would it leave the Government's grand tax-rate cutting promises?