Economic forecast revised upwards

THE only way the Government can overcome the massive shortfalls in tax receipts is by cutting public sector pay, according to Bloxham, which believes Ireland has weathered the worst of the global economic downturn.

And Bloxham’s chief economist Alan McQuaid fears increased Government taxation might choke off the potential for growth as Ireland becomes more competitive by the day as costs continue to fall.

“Deflation in Ireland is shaping up to be far more pronounced than in the rest of Europe and is forecast to average 4.5% in 2009. As a result, Ireland finds itself better placed than most to restore itself as a highly competitive nation. That said, Government policies may choke off any competitive advantages that Ireland has through over-taxation.

“The income levies are already offsetting much of the gains in disposable income and any more tax hikes could see that advantage completely wiped out. In our view, the Irish Government needs to come up with a more ambitious plan than just taxing the PAYE worker. We have long felt that the Government should consider the sale of state assets. Notwithstanding the difficult current financial/credit market conditions, such a move could raise a considerable amount of money — €8 billion to €10bn,” he said.

Bloxham, Ireland’s largest independent financial advisers, said the public finances remain a mess and more tough remedial action will be needed by the Irish Government over the next couple of years if they are to be returned to a more acceptable and sustainable level under European Commission requirements.

“However, adjustments in Budget 2010 should be centred on the spending side rather than more taxation. Over-taxing the PAYE sector at this stage could do more damage than good and send the economy backwards rather than forwards,” added Mr McQuaid.

The Bloxham economist said: “One gets the impression that if the Minister for Finance Brian Lenihan was let get on with it, he would be able to navigate the economy back into calmer waters. In our view, he seems to have a steelier determination to tackle the huge public sector pay and pensions bill than some of his colleagues. We can’t see how the public finances can be put on a sound footing again over the next few years unless public sector pay is addressed,” he added.

Bloxham have changed their real GDP forecast for this year to -8.5% from -9.0%, and believe the economy will contract by a further 2.3% in 2010.

Mr McQuaid said: “In overall terms, the Irish economy is unlikely to return to positive growth until the second half of next year, and it will be 2011 before average growth for the year as a whole is back in plus territory.”