The European Commission is asking EU finance ministers to tell the Government to tighten Budgetary policy to fight inflation. The ministers will probably approve this recommendation, even though the kind of Bugetary measures the Commission proposes would be unlikely to have much impact in curbing inflation. The Commission believes that the 2001 Budget is pumping too much money into the economy. The draft text being put forward by the EU Commission for consideration by the ministers calls for countervailing measures to be taken this year. It says that the Budget added £400 million too much into the economy and that the Government should act to offset this unwarranted stimulus. The latest version of the recommendations, which have gone through a number of drafts, does not specify how this might be done. However an earlier draft suggested postponing tax reductions or slowing the increasing in Government spending and these are clearly the kinds of measure which the Commission would favour.
Mr McCreevy has made it clear that he will not rewrite last December's Budget. This package injected too much cash into an already-booming economy, particularly through a very generous package of tax reductions. That said, it would be wrong to suggest that Budgetary policy is the main reason for the high inflation rate. Last year's trend of a weaker euro and rising oil prices were the main causes. A reversal of some of the Budgetary tax cuts would be unlikely to have a measurable impact on the inflation rate, while any postponement of capital investment plans would be unwise.
The wording of the Commission recommendation may be vague enough to allow the Government to do little else this year but ensure that additional tax revenues go into increasing the Budgetary surplus, rather than further fuelling extra spending. However it would make it difficult for Mr McCreevy to introduce another overly-generous Budget - for 2002 - later this year, unless economic growth slows sharply in the meantime and inflationary pressures ease. To do so would risk further worsening a political relationship with our EU partners which has already suffered in recent years.
The Commission, for its part, should realise that seeking changes in the 2001 Budget announced last December is unrealistic. It will surely be jumped on by the euro-sceptic wing in the UK as further evidence of their position that the euro zone is a move towards a European superstate. Such fears are much exaggerated; but the affair does raise important questions about how Budgetary policy is monitored in the single currency area and the extent of the influence of the euro zone group on the tax and spending plans of individual states.
The Commission's action has already done some damage to the international reputation of the Republic's economy. There must also be a suspicion that dislike of our low corporate tax regime in some of the bigger EU capitals has been a factor in the Commission's somewhat heavy-handed tactics. However the Government here cannot ignore the views of our EU partners. The issues they have brought up need to be discussed in a logical fashion; our economic success means we can negotiate from a strong position, while the expected slowing of growth this year should ease the fears of the other euro zone members about overheating in the Republic's economy.