Budget tax cuts warning issued by IMF

The Government should not cut taxes in the next Budget, as doing so would risk fuelling inflation, the International Monetary Fund has warned. In its strongest warning to any recent Irish government, the IMF points to the danger of a house price "bubble" and warns of the threat which a reversal would pose to the financial sector.

Despite the IMF's concerns, the two Government parties will reaffirm their intention to reduce income taxes when they complete the review of their policy programme next month. The official Government response yesterday was to welcome the IMF's analysis. The Minister for Finance, Mr McCreevy, said they had concluded that Ireland can remain "on a relatively strong growth path" if it maintained a course of moderation.

Sources insisted privately, however, that the Coalition was committed to a programme of tax reductions, and the only question was how and when they would be introduced.

The senior IMF executive directors conducting the review said that indications of inflationary pressure were growing despite moderate recent consumer price index figures and policy should address this problem.

For this reason, the overall level of taxation should not be cut in the Budget, and reductions in taxes in any area should be offset by increases elsewhere.

Some of the IMF directors warned that a new national agreement to replace Programme 2000 should not be "bought" with inappropriate tax cuts.

The IMF warned of the dangers of a "bubble" in the housing market, and the risks which a sharp fall in prices could pose to borrowers and to the banking system. They welcomed a recent Central Bank move to examine the vulnerability of the financial sector to a downturn, and said that Ireland could consider seeking advice in conducting a review of the risks from officials in a country which had experienced "a real estate boom."