Goodbody warn of benchmark madness

THE long term needs of the Irish economy would be best served if the Government abandoned its ‘madcap’ public sector benchmarking pay deal, according to Goodbody Stockbrokers.

In a hard hitting Summer 2003 Review the wholly owned AIB subsidiary says there is a risk that pressure for tax increases will build in the medium term.

“Conservative budgetary management in recent years would have provided the government with ample resources to indulge in a counter-cyclical boost in the form of increased spending on infrastructure (traditional means) or further income and corporate tax reliefs.

“However, due to the largess of the 1998-2002 period and a few madcap but expensive schemes such as benchmarking and SSIAs, the government finds itself in something of a budgetary bind. All effort is focussed on limiting spending growth to some 6% in a desperate attempt to stabilise the General Government Deficit at a tolerable level,” the report’s authors Colin Hunt and Don Walshe said.

The Goodbody duo said Ireland cannot go back to a time when spending levels dictated taxation.

“The economy now has an incentivising taxation regime. It is inconceivable that it could be dismantled in order to allow policymakers to push spending growth above its sustainable level,” they cautioned.

Goodbodys believe the state should encourage the National Pensions Reserve Fund to invest some of its resources in domestic, income-generating public capital projects.

“However, if the government wanted to do something truly radical in order to relax the fiscal corset for justifiable spending purposes, it should halt the implementation of the Benchmarking report,” they add.

Goodbodys believe the GDP growth will fall from 6.3 in 2002 to just 2.9% this year which is well below their original forecast of 3.6%. GNP is forecast to come in at 3.5%.

“Ireland’s tax driven attractions as a profitable manufacturing location were enhanced by the global slowdown with international margin pressure encouraging multinationals to use their Irish plants for high-value added output.

“This desirable economic fundamental allowed exports and profits to reach a record high despite the sluggish state of global demand,” they said.