Tougher Budgets likely as tax forecast 'too optimistic'
Published 24/03/2010 | 05:00
THE Government may have to bring in even tougher Budgets than planned because its forecasts for future tax revenues are too optimistic, one of the country's best-known economists said yesterday.
Despite predicting a return to growth next year, with the economy expanding 3.1pc, Jim Power said this would not generate the kind of tax buoyancy which the Government hopes for.
Budget plans -- already criticised as too vague by the EU Commission -- see tax revenues rising by almost €2bn in 2011. This would include both new taxes and buoyancy from forecast growth of 3.3pc.
Although this is not much different from Mr Power's forecast, the Friends First economist said the nature of the 2011 growth meant it was unlikely to produce much by way of tax buoyancy.
"You need a recovery in employment to get tax buoyancy and that is not going to happen," Mr Power said. "We will not wake up one morning in 2011 and find that the crisis is over.
"Next year's growth will be coming off a low base. It will also be driven by trade, which does not create many jobs," he said.
Mr Power agrees with Brussels that the Government should respond to any slippage with more spending cuts and a broader range of taxes, in order to avoid a "Greek tragedy".
"In an ideal world, you could allow a bigger deficit in such circumstances, but would the bond markets allow it? Interest rates on government borrowing could rise, and that's a serious problem.
"Already, interest costs are put at €4.4bn this year -- more than the correction in last year's Budget. The Government plans see the cost reaching €6.6bn in two years. Any slippage and the game is up."
He expects a further 10pc fall in house prices this year, which would leave them almost two-thirds down on their peak. House completions in 2010 could be as low as 12,000 -- less than half last year's level.
Home buyers could escape any significant rise in ECB interest rates until 2012, as the euro economy remains weak. However, lenders are increasing their own rates, which will contribute to a return to inflation over the course of this year, and a 2pc rate next year.
"That's a bit disappointing. One would have hoped for a more impressive markdown in consumer prices in a recession of this kind," he said.
Ireland needs a global recovery, a stabilisation in house prices, and a repaired banking system, Mr Power said. "Fixing the banks will be long, painful and expensive. The experience of every banking crisis is that they cost a lot of money -- 20pc to 25pc of GDP on average."