Top rate of tax can rise 4%, says leading economist

The Government has scope to add 4 per cent to the top rate of tax and 1 per cent to the bottom rate in the forthcoming Budget, according to a leading economist.

Jim Power, chief economist with Friends First said today that there is also scope to increase duties on tobacco, alcohol and petrol in next week's supplementary Budget.

However, he warned that the overall focus of the Budget must be on measures which will enhance the competitiveness of the economy and the environment for entrepreneurial endeavour and employment creation.

The Friends First Quarterly Economic Forecast, which was published this morning, suggests that Ireland is unlikely to return to economic growth next year.

It projects that the Irish economy will contract by around 6.6 per cent this year, which is in line with the Government's projections.

“In order to stimulate economic recovery in 2010 a number of factors will have to fall into place. The international economic climate will need to improve , while on the domestic front the housing sector will need to stabilise, credit availability will need to improve and exchange rates will need to move in Ireland’s favour and most importantly greater certainty will be needed in relation to future fiscal policy,” said Mr Power.

“As a small open economy, we find ourselves in a tough situation, due to external and domestic difficulties. The very real crises in the public finances and the labour market can only be resolved through a growing economy. Stakeholders must realise that while it is not possible to tax one’s way out of a recession, it is very easy to tax one’s way into an even deeper recession. A strategic vision for the future and strong leadership are now required if Ireland is to put itself on the road to recovery.”

He added that a careful crafting of the budget would be key to our chances of economic recovery and warned that this would not be an easy task.

“The Minister for Finance will need to be extremely careful that he does not finally kill off the consumer with ill-judged tax increases,” said Mr Power.

The Friends First forecast suggests a number of measures are necessary to aid economic recovery including wage restraint, tackling public spending, continued investment in education and IT, the establishment of a 'bad bank' to manage debts and the introduction of a proper financial regulatory framework.

It also stresses the need to allow the cost of housing needs to correct itself fully.

“Over the past decade, Ireland became inordinately dependent on the construction sector. Many policies were directed towards growing this industry, very often at the expense of others. Many businesses could not compete with the construction sector for labour and capital and this created a skewed economy, which has now been savagely exposed," said Mr Power.

"Irish policy makers now need to identify the sectors that are capable of driving the economy and employment in the future. These should include; tourism, the agri-food industry, professional service exports, R&D activities, a foreign owned component and an IT industry focused on providing solutions to areas such as water quality, alternative energy/renewables and health,” he concluded.