Wage-driven inflation a threat to tax cuts - Minister

The Minister for Finance, Mr McCreevy, has warned that wage pressures will fuel inflation and could mean smaller tax cuts in the forthcoming Budget.

Speaking after a lunch of the Leinster Society of Chartered Accountants yesterday, Mr McCreevy said the level of tax cuts in the forthcoming Budget would depend on what additional spending was agreed between now and the Budget. "Much depends on whether we give in to some or all of the demands on us," he added. "But we have to avoid a cocktail that will blow all our success apart."

The Minister warned that there would be "no hiding place" in monetary union if wages were driven even higher by growing inflation.

He said that the next year could see a fall-off in direct foreign investment and in orders for our exports, along with surging domestic demand. This would create an unbalanced economy, he added.

Exercising customary pre-Budget caution, the Minister also insisted at the lunch that there could be no expenditure or tax bonanza in this year's Budget and that most of the benefits would be directed to lower and middle-income taxpayers. The size of the package of tax cuts would depend on the level of spending agreed over the coming weeks as well as on whatever agreement the Government came to on social welfare rises.

The Minister also reiterated that all of the surplus on spending this year, expected to be between £900 million to £1 billion, would be used to repay some of the national debt. The Department of Finance's official forecast at the end of September was for a surplus of £800 million.

Over the long run this approach would leave the public finances in a far healthier position, he said.

He added that the size of the tax cuts would be dictated by the size of the debt, inflation, the Government's prior political commitments as well as social priorities and any remaining commitments under Partnership 2000.

"Large-scale and widespread tax cuts carry serious inflationary risks for the follow-on to Partnership 2000. We simply have to limit our focus on tax changes to benefit the lower and middle-income groups," he said.

The Minister also warned of the dangers confronting the economy as a result of the worldwide economic downturn. "We are facing a significant slowdown in the US and UK economies - two of our key trading partners - and increased uncertainty regarding international economic and financial stability."

He also pointed to domestic inflationary pressures in the housing sector as well as labour shortages and wage pressures. "Unrealistic expectations all round are the order of the day. We have to adjust our sights and be more realistic."