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Thursday, 18th April 2024
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Taxes: to hold or to cut, that is the question
Next month’s issue of FINANCE will carry the results of a policy survey amongst Ireland’s finance sector economists on several key questions about the economic content of the election manifestos of the political parties. The Irish economy now stands at a critical juncture, as the manifestos will set the mould for the future shape of policy for the next five years.
It is still not true that Ireland‚s economic destiny has passed out of its hands with the advent of the euro - fiscal independence and the right to vary taxes remains a reality within the EU. Irish Governments, of all coalition persuasions, have in the 1990s stood for the principle of fiscal independence. And by all accounts, those on either side of the political divide in this coming election continue to favour it. The Nice referendum result would indicate strong support in Ireland for a fiscally independent Europe. Given the national consensus there is for a fiscally independent Ireland, it is important that it will be used wisely in the five years to come. Ireland can either use it to raise taxes and raise spending, as the Swedes have done, or lower taxes and maintain spending at an appropriate commensurate proportion of national income as both Luxembourg and the Republic have done. The economic results of the 1990s indicates that the Ireland/Luxembourg approach has been more successful than that of Sweden.
The political parties now have the opportunity to get it right or make a mistake and suffer the consequences at the hands of the electorate. Fianna Fail and the Progressive Democrats have commanded the low tax/low spend position up until now. We have yet to hear whether they will, as they did in the last election, offer Ireland the prospect of continued lowering of taxes where economic circumstances permit. So far both parties have only spoken about maintaining taxes at present levels. The Opposition parties appear to be gearing up towards a promise of at least not increasing taxes in the election either; whether they will commit to lower taxes also remains unclear at the time of going to press.
The best policy for Ireland at this juncture will be to implement a strategy of yet lower taxation where economic circumstances permit. Certainly a top rate of 42 per cent income tax (plus levies and PRSI) is still too high - economic circumstances would certainly permit reductions >from such a level, which is excessive compared with rates in other, competing, labour markets. The parties that espouse this approach in their forthcoming electoral manifestos will be choosing the correct economic strategy as far as the continuance of Ireland‚s economic golden age is concerned. However there are grounds to fear that they won‚t. That fear gives grounds for major concern for the future of the Irish economy, because if they don‚t choose the tax lowering approach then that golden age will most certainly be at end.

Lessons from Baltimore
Lately a number of stocks have fallen foul of 'Enronitis', the emergence of fears in the equity markets that the glossy reports of public companies may not so much be glossy, but glossed (as in 'over'). This is a reflection of the ephemeral dot com corporate finance culture that became dominant in the latter half of the 1990s. AIB‚s recent trouble in the US was in another category. This was a failure of internal risk control systems. It is to be hoped that the bank's current investigations come up with an effective remedy, and that the defences will be shored up to a sufficient degree to provide comfort to AIB customers, shareholders, and clients (including in areas such as global custody) that its risk control systems are of 'triple A' standard.We report on a survey (on page 1 of this issue) which was recently conducted (before the Allfirst news broke) on the risks facing financial institutions. The survey placed the risk caused by a rogue trader in a lowly 24th place. It seems (whatever about AIB) that some banks have been lulled into a false sense of security that seems to have returned as earlier transgressions faded in the memory. AIB's misfortune was that it turned out to be the victim, and is suffering the consequences. However, this survey indicates that others still are vulnerable, and will be, unless they rate the rogue trader risk higher.

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