Cowen should aim for 'broadly neutral' Budget, says ESRI

The Government should aim for a "broadly neutral" Budget, resisting the temptation for major tax and spending giveaways, according to senior ESRI economists.

The tax system and social welfare rates should be adjusted for inflation, according to a paper to be delivered this morning by economists Mr Shane Garrett and Mr Danny McCoy, but overall the package should not aim to stimulate the economy.

The strong economic outlook and buoyant tax revenues will give the Minister for Finance, Mr Cowen, some room for manoeuvre, according to their paper to be delivered to the ESRI pre-Budget seminar in Dublin this morning.

In common with some other recent forecasts, they estimate that Mr Cowen will have at least €1 billion and possibly approaching €1.5 billion to allocate to new spending and tax measures on Budget day.

On balance, they conclude that the Budget should "aim for a broadly neutral fiscal stance incorporating indexation of tax and welfare in line with prices and wages."

This would allow the Minister, Mr Cowen, to increase tax credits and the standard rate band for inflation. This would ensure that wage inflation would not see more employees pushed into the higher rate 42 per cent tax net. However, the ESRI advice is to avoid significant further tax cuts beyond this.

The expected international upturn will lift the economy in any case, while interest rates will remain relatively low. "Fine tuning" the economy through fiscal policy can also be difficult, the economists point out, and in any case Budget policy has a limited role in a small open economy like Ireland.

The outlook for the economy is generally favourable, according to the economists, with the strength of employment being particularly notable. GNP is expected to grow by 4.8 per cent this year and 5 per cent in 2005 and the outlook beyond 2005 is favourable.

Meanwhile, in a separate paper at today's conference, ESRI economists Mr Tim Callan and Mr Brian Nolan say that while average income per head has risen dramatically in Ireland over the last decade, the numbers falling below the relative income poverty threshold remain "well above the EU average."

The economists define this threshold as 50 to 60 per cent of median income - the mid-point between the highest and lowest income.

The paper says that 15 per cent live below 50 per cent of the median income here, the highest in the EU and well above the 9 per cent EU average. All those falling below the threshold are "not poor", the paper says, but they are "at risk of poverty".

Differences in tax and welfare rates and structures are a key factor when looking at the higher percentage of people at risk of poverty here compared to a country like Denmark, it finds.

Simulations applying the Danish welfare structures and supports to Ireland find this would substantially reduce the risk of poverty.

However, funding this level of welfare would require major increases in tax levels - amounting to increases of 11 percentage points in both the standard and higher income tax rates.

Child income support here has more than doubled as a proportion of the average industrial wage between 1999 and 2002, catching up with Danish levels. This means that the high percentage falling below the relative income poverty threshold relates more to the overall structure of the welfare system than to child benefit per se.

Successful anti-poverty policy requires both enhanced education and employment opportunities and improved income supports, the paper concludes.

Higher spending would require higher taxes and the implications of this for the economy "are critically important to the strategic choices to be made."