Last month, our partners in the European Union agreed to a three per cent revaluation of the Irish pound against other EMU currencies. But there was a cost. Finance Minister, Charlie McCreevy, had to agree that any Budget surplus in 1998 would be used to reduce the national debt, rather than for tax cuts or special projects.
The prime reason for the revaluation was fear that inflation will take off in this country. And yet, the warning signs of an inflationary bubble developing in house prices and fixed assets have existed for about two years. Even when the Irish Congress of Trade Unions warned that spiralling house prices would feed into a general demand for higher wages, the best the Government could do was to set up an inquiry.
That lack of urgency was compounded by other, inflationary decisions on pay and taxation taken recently by the Minister for Finance and the Government. And in the past two months, the rate of inflation has jumped by 1 per cent.
But the policies of the Fianna Fail/Progressive Democrats Government have not been wholly negative. And, given the nature of their pre-election promises, some of the decisions were inevitable. In terms of budgetary control and spending policies, however, there is really little to distinguish them from their Fine Gael/Labour Party/Democratic Left predecessors.
In spite of pre-election promises to hold spending for capital purposes to 5 per cent this year, the Government parties let it rip in the Budget and pencilled in 17.5 per cent.
Some of the extra money was required to draw down matching funds from Europe for road works and environmental projects, but a sizeable percentage was devoted to education, social housing in deprived inner-city areas and prison building.
Education is now officially recognised as the key to our economic success story. And the decision to concentrate spending on the sub-standard national school system is as welcome a development as the three-year, £250 million investment plan for educational technology. It represents a continuation of the long-term planning that has served the country well in this area.
Elsewhere, unfortunately, government responses have tended to be reactive and appeared to be driven by powerful vested interests. The decision to cut capital gains tax from 40 to 20 per cent at a time when the economy was booming increased speculative tendencies, especially as the tax on building land profits remained unchanged, while investments in new houses and flats benefitted from the 20 per cent rate. It also sent a very negative signal to PAYE workers and to those depending on social welfare.
Last year, the National Economic and Social Council produced the most positive long-term forecast ever seen by this society. It predicted that the Irish economy would continue to grow by an average of 5 per cent a year, for the next 12 years, if Government spending, national wage levels and inflationary pressures were kept under control.
Unfortunately, we now seem to be getting slippage in all three areas. And the old tendency to juggle the figures will not be allowed within a single European currency.
Given that the Department of Finance has deliberately under-estimated the likely size of the Government's tax take for the last number of years, in order to provide for financial and political flexibility, we are looking at a new departure. In other words, this year's planned-for surplus will not be available to massage next December's, pre-Budget figures.
It is a harbinger of the financial rectitude that will be required once we formally lock ourselves into Economic and Monetary Union and a common currency, next month. And we have not prepared particularly well for the adventure.
For all the talk of a "tiger" economy and the miracle of recent economic growth levels, the Republic's infrastructure is relatively under-developed by European standards. Our roads, railways and transport systems require massive investment, as does water, sewage, electricity, telecommunications and other services. In that context, significant aid from the EU Structural Funds will dry up over the next five years and we are likely to become net EU contributors within 10. Some of the necessary funding may be raised through private investment in toll roads and in strategic alliances formed by our commercial State companies. And the Government will also privatise whole operations, as in the case of Telecom Eireann, Cablelink and others.
But there will still be significant shortfalls in infrastructural fundings. They will come a time when the Government will be trying to juggle two competing objectives: to reduce the rate of corporation tax for all domestic and multinational companies towards a flat rate of 12.5 per cent, and to cut income tax rates for the PAYE sector as an incentive towards another national wage agreement.
Experience in other countries has shown that a low corporation tax rate, combined with a relatively high income tax rate, has the effect of increasing the burden on ordinary workers. Self-employed people, and others in a position to do so, register themselves as limited companies in order to avail of the low tax rate. But PAYE workers do not have that option. They continue paying tax at the higher rates, and social cohesion is damaged.
It may be that McCreevy intends to legislate against such a development here but there have been no indications of this so far. The recent Government announcement that it intends to introduce a minimum wage of £4.40 an hour in the year 2000 will claw back some of those windfall corporation tax benefits from the domestic services sector, while helping low-paid PAYE workers. But it may not be enough. Tax cuts for the lower paid will also be required.
The cost of these competing demands will make it very difficult for the Government to fund the kind of infrastructural investment required by the economy, without adding to the inflationary tendencies which threaten to choke economic growth.
Covetous eyes are now being cast on the £2-3 billion in monetary reserves held by the Central Bank, which may become available to the Government when monetary union takes effect. And pension funds are also being considered as likely future investors in the State's infrastructure.
Nothing is certain in this area. There is still the impression of Government policy being devised "on the wing". That, indeed, is the only possible explanation for recent decisions to halve capital gains tax and to provide no-strings-attached pay awards for higher public servants which will, inevitably, feed into wage demands in the future. The Government's decision to increase capital spending in the Budget is perfectly acceptable in terms of adding to the effectiveness and efficiency of the economy. But its taxation and pay policies are something from a bad dream and could leave everybody poorer in the long run.
