Tax hikes inevitable: expert

A FURTHER worsening of the national finances could result in a massive increase of up €1 billion in indirect taxes in next month's Budget.

Leading economist Jim Power, of financial services provider Friends First, warned that the Exchequer was facing a deficit of more than 1bn this year, much worse than the 750m deficit conceded by the Department of

Finance.

In 2003, Finance Minister Charlie McCreevy faces a sizeable opening deficit of 2.5bn, which he will have to address by hiking taxes and cutting back severely on spending if national finances are not to be derailed.

Target areas include petrol, alcohol and cigarettes (the old reliables) to bring in 400m. He could raise a further 200m by charging car spaces as a Benefit in Kind, while direct taxes (PAYE) could also bring in 200m if they were not indexed in the Budget, Mr Power said.

He said that given the huge slowdown in the global economy, the public should expect sharp increases in

indirect taxation, but he thought it improbable that the minister would put a 2 tax on a packet of 20 cigarettes.

This year's budget will be the most difficult in almost a decade and tough choices have to be made.

Spending growth will have to be pegged back to about 6% per year in the medium term, reflecting global economic reality.

Mr Power was speaking at the launch of his company's Quarterly Economic Outlook, which has cut 0.2% from its growth forecast for this year.

This year's GDP will now be 3.7%, down from 3.9% in July. Mr Power said that in such a low growth environment, the minister's options for the Budget had been "seriously limited."

On that basis, Mr Power ruled out the possibility of tax bands.

The economist also said that cutbacks should not be made for cosmetic reasons and should be targeted carefully, saying health, education and infrastructure cuts in 1987 created serious problems.

He suggested revenue-raising measures, including non-indexation of tax bands, higher taxes on the old reliables and the imposition of benefit in-kind on employer-provided car parking spaces.

He forecasted GDP and GNP growth of 3.7% and 3% respectively for next year. For both, this is 0.2 of a point lower than his forecast in July.

Delivery of the National Development Plan was desirable but he estimated that the 51bn project would deliver at least half of that originally envisaged in real terms because of inflation.

It emerged yesterday that Central Statistics Office figures show gross domestic product grew 6.5% in the second quarter of 2002 compared to the last year. The gross national product figure was up 4%.

Gross national product excludes net factor income flows, mostly profits from multinational companies based here. Increases in GDP and GNP of 5.5% and 2% respectively were returned compared to the first half of 2001, sharply lower than in the previous two years.

Consumer spending in the second quarter moved up by just 2.3% compared to Q2 last year, while capital

investment dropped 1.1%.

Exports and imports increased by 4.8% and 2.6% respectively, while industrial output rose by 11.6%.

Commenting on the CSO figures, IIB Bank's Austin Hughes said that the CSO figures confirmed a view of an economy "that is weakening, but not collapsing".

For the economy, the real question is whether the internal and external environment will create enough momentum to drive it forward next year.