Growing population lends scope for income tax cuts

AS IRELAND’S population grows to more than 4.5 million over the next three years, the Government will have scope for income tax cuts, Davy Stockbrokers argued yesterday.

A report entitled Beyond the housing shock — Why Ireland will grow faster than the euro area in the medium term, economist Rossa White states Ireland’s potential growth rate is 3.5-4% until 2011, comprising trend productivity growth of at least2% and labour force growth of 1.5%.

“Ireland’s personal income tax rates are still slightly above average. That is partly due to progressivity (caused by higher-than-average inflation and strong real per capita GNP growth). Ireland’s demographic structure and low dependency rate mean it has scope for further income tax cuts in the next few years,” he said.

Mr Rossa says in its favour Ireland has “lighter business regulation, a more flexible labour market, a better educated young workforce and a smaller public sector than most EU countries”.

Trend productivity growth of at least 2% can be maintained, Mr Rossa believes citing five reasons:

* the huge increase in the capital stock over the past decade;

* consistent investment in education;

* light regulation of business;

* the flexibility of the Irish labour market; and

* a relatively small public sector.

Mr Rossa notes Ireland’s labour market stands out as one of the most flexible in the OECD: “It ranks well both in terms of permanent and temporary contracts. Labour market flexibility is an important factor that boosts productivity growth and increases the incentive for companies to raise employment.”

Mr Rossa’s research shows Ireland’s public sector portion of total employment is ranked in the lowest 10 of 17 EU countries for which data is available.