Business group Ibec has reiterated its call on the Government to drop its plans to increase taxes by €500 million in October’s budget despite warnings to the contrary from Europe.
The call, in a report released by the organisation today, comes in the wake of a warning from European Stability Mechanism (ESM) managing director Klaus Regling that the Government must stick to its plans for a package of spending cuts and tax increases totalling €3.1 billion.
Mr Regling’s assessment has been backed by the chairman of the Government’s Fiscal Advisory Council Prof John McHale,who said the Government should pursue an adjustment of €3.1billion in October’s budget.
Speaking on RTÉ's This Week programme, Prof McHale said not pursuing the full €3.1 billion in savings was a risky strategy.
“The money adjustment targets are directly relevant in that much of Ireland’s credibility in terms of showing it has the political capacity to make the necessary fiscal adjustments really revolve around meeting those targets.”
His intervention followed comments over the weekend by Tánaiste Eamon Gilmore, who said that a €3.1 billion budget adjustment was not an agreed target.
Mr Gilmore said he does not see a case for doing more than is necessary to meet the Government's target of getting the deficit under 5.1per cent in 2014.
Deserve a break
In a statement published alongside its Quarterly Economic Outlook this morning, Ibec's head of policy and chief economist Fergal O'Brien says "Irish taxpayers deserve a break...plans to increase taxes by €500 million should be dropped".
Ibec’s economic outlook predicts that economic growth will be slower than expected this year, and has revised its original forecast that gross domestic product (GDP), a measure of all the wealth generated by the Republic, will expand by 1.8 per cent down to 1.1 per cent.
This is based on figures for the first three months of the year showing that the economy shrank by 0.6 per cent in the first three months of the year while key areas such as exports performed poorly.
The organisation estimates that the value of goods and services sold abroad will increase by 2 per cent for the year as a whole, compared with its original prediction that this would grow by 3 per cent.
However Mr O’Brien, believes that a stronger performance in the second and third quarters and improving fundamentals will drive future growth, and he says that GDP is likely to increase by 2.3 per cent in 2014.
Based on this and the cuts of the last five years, which Ibec has consistently supported, Mr O’Brien says that the Government has choices in what path it follows in next October’s budget.
"Even if the fiscal adjustment is reduced from €3.1 billion to €2.6 billion we will still reach the 2014 deficit reduction target."
Tax carryover
In the report he suggests that the €2.6 billion adjustment could be achieved through €2 billion in cuts on the one hand and a €600 million tax carryover from last year's budget.
Ibec's argument runs directly counter to Mr Regling's warning in an interview with The Irish Times, where he said that the markets were watching developments here carefully as the Republic gears up to exit its EU-IMF bailout at the end of the year.
The ESM chief described the €3.1 billion adjustment, required by EU budgetary rules and agreed with the Government, as “the important next step” for the Republic.
He also warned that an application from the Government to the euro zone’s finance ministers for a precautionary line of credit to aid the State’s exit from the programme would not be well received if it failed to meet the €3.1 billion target.
Ibec also says that the budget gives the Government an opportunity to set out some markers for its post-bailout economic strategy.
Unnecessary regulation
The organisation warns that the Government needs to clear the pitch of unnecessary regulation and high taxes, which are obstacles to enterprise.
“Ireland generally has a good enterprise climate but many taxes are now too high and inhibit entrepreneurship and work,” its report says.
