As the general election draws near, the worsening state of the Government's finances and the prospects for future investment and economic growth are being subjected to intense scrutiny by the business community. Goodbody Stockbrokers, a subsidiary of Allied Irish Banks, yesterday concluded there had been a significant deterioration in fiscal management during the past two years which, if uncorrected, would lead to a return of a structural budget deficit and a possible breach of the EU Stability and Growth Pact. Low taxes and high spending, it declared in a special report, are no longer compatible.
The options put forward by Goodbody involved halving Government spending from a planned 12 per cent this year to 6 per cent in 2003 and succeeding years - or higher taxes. As might be expected on the tax front, it concluded that income tax, rather than corporation taxes, would have to rise because the latter approach would "break a covenant with industry" and reduce Ireland's attractions for foreign investment. Such a view is unlikely to find favour with those voters who believe that - rather than increase income taxes - extra revenue could be generated by postponing cuts in the level of domestic corporation tax or through higher capital acquisition and capital gains taxes. The proposal for a dramatic reduction in Government spending, and its implications for inadequate public services, will also challenge the political parties to make their positions clear over the coming months.
Current difficulties should not disguise the huge advances that have been made during the past 15 years, when annual GDP growth averaged 7 per cent. The latest EU statistics show that Irish employees work the longest hours and have the highest levels of productivity. Wages and inflation levels are, however, rising faster than those in other EU States, although taxes are considerably lower. Last night, the Tánaiste and leader of the Progressive Democrats, Ms Harney, told the Institute of Taxation there were no circumstances in which Ireland would cede its right to decide its own taxation strategy to the EU. Recognising that domestic tax increases were "definitely back on the political agenda", however, she identified the 12.5 per cent corporation tax rate as "a permanent feature" and the cornerstone of investment policy. The general election campaign is clearly underway.