The December Budget looks set to deliver on tax concessions for the lower paid and also on a significant increase in spending on roads and other infrastructure.
It is understood that both proposals, contained in a paper delivered at the Kenmare Economic Workshop, are under active consideration by the Department of Finance. The report's authors, Davy's chief economist, Mr Jim O'Leary, and Maynooth professor, Dr Gerry Boyle, argued that skilled labour and reasonable infrastructure are the keys to continuing Irish growth.
The two men, both former Fine Gael advisers, argued strongly that the Minister for Finance, Mr McCreevy, should reduce taxes for the lower paid in the next Budget. This would encourage more people into the workforce to fill the growing number of vacancies. They also called on the Minister to raise public capital spending.
Spending is needed on roads and rail links, as well as servicing land for new housing. It is understood that Mr McCreevy is in broad agreement with these proposals.
Dr Boyle and Mr O'Leary added that the greatest emphasis should be on the shortage of infrastructure, particularly problems with traffic and housing.
A Trinity College Dublin (TCD) economist, Dr Philip Lane, also warned that taxes cannot continue to be cut every year under the partnership deal. Both he and an IBEC economist, Mr Brian Geogeghan, agreed that the deal must be renegotiated, and said it would look very different in the future.
Dr Lane also pointed out that there could be serious repercussions if the Republic ever suffers a banking crisis. At present, the Central Bank acts as a lender of the last resort but it will not have that power from January 1st, as this transfers to the European Central Bank (ECB) in Frankfurt. However, the problem is that the ECB itself is unlikely to intervene in a purely regional financial crisis which does not pose a risk to the system itself. He warned that in such circumstances local banks could be sold off cheaply to large German banks such as Deutsche or Dresdner.
However, one option could be to establish a "reserve fund", but this does not appear likely and may actually be forbidden under EU legislation. Dr Lane insisted that it would simply act in a similar way to the Central Bank's external reserves which were retained, even when debt levels and servicing costs were very high. Dr Lane also called for a complete overhaul of the Budget process.
"The overall stance should be determined before negotiating any changes on tax and spending," he said. "That would strengthen the hand of the Minister for Finance who could then demand cutbacks in other areas to compensate for growing demands in another."
