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Calling for prudence in an uncertain market Back  
Jim Power believes that delivering a ‘boring’ budget with fewer ‘heroics’ will serve the country best.
The economic backdrop to Budget 2002 will be quite different to any budget you have presented in your relatively long tenure at the Department of Finance. The economy is losing momentum at quite a pace and the threats to our economic wellbeing are greater than at any time over the past decade. The sharp US slowdown and particularly the problems besetting the IT industry in that country are serious. After five years of heavy investment in technology, the boom has come to an end and we are now facing into a period of prolonged consolidation in the industry as the investment overhang is unwound. This means that IT FDI flows are likely to dry up and indeed we will be doing well to hold on to what we have got. The performance of the ECB in the face of a sharp slowdown in European demand is not helping the cause of IT companies in this country who are selling into that market, and you should direct your next attack on the European bureaucracy at the stool pigeons in the ECB.

Last year represented the peak of the current Irish economic cycle and the much-vaunted slowdown is now happening. An easing of growth was inevitable at some stage and indeed could be described as desirable, given the capacity constraints and inflationary pressures in the economy. The only question that now remains to be answered is the type of landing that will be achieved. I have long been an advocate of the ‘soft landing’ story, but current developments in the US and Europe are sufficient to test one’s faith in the theory. Many Irish politicians and some economists argue still that Ireland’s economic fundamentals are extremely strong and the economy will come through the current difficulties relatively unscathed. That may be the case, but apart from low interest rates and a favourable demographic structure, I find it difficult to identify any other factors that could make us immune to the economic cycle. Our fundamentals are pretty similar to many other countries out there. Being Irish doesn’t necessarily make us unique or freaks of economic nature. We are currently facing a domestic IT shock and an external global growth shock and not surprisingly, the economy is slowing. It has been proven over the past 18 months that the technology industry is indeed a cyclical one, and now it is being proven that the Irish economy is also subject to cyclical influences.

It is against this economic background that you set your budget and for the first time it looks as if the budget targets for the current year will undershoot projections. So in framing this budget, I think that a conservative approach should be adopted and that amateur dramatics should be avoided. You should limit your speech to about 30 minutes and allow us all get home a bit earlier than is customary on budget night. I would make like to make the following suggestions as to what you might consider:

Taxation: You have almost delivered the taxation package that you pledged for yourself at the time of the formation of this government. Granted I was not always enamoured with some of your policy stances, but I think that you should be congratulated on the achievement of your pledges and in some limited sense you have achieved a considerable reform of the tax system. In this budget I would like to see you introduce a middle tax rate of 30 per cent. The current gap between the top and bottom rate is too large. No more than the top 5 per cent of earners should end up paying the top rate. So rather than cutting the top rate any further, I think a middle rate and another 1p off the bottom rate would be more desirable. However, I am a bigger fan of wider bands rather than lower rates, but I understand your ideological blind spot in that regard.

Housing: The housing market is still a problematical area and particularly the rental sector. Some of the initiatives introduced by Government in recent years have actually exacerbated the problems in the rental sector. In this budget you should re-introduce mortgage interest relief on second properties that are rented. It would also be nice to see the social housing guidelines scrapped. In fact you could look at most of the initiatives introduced in the aftermath of the three Bacon reports and confine them to the dustbin of history.

Expenditure: Public expenditure is growing too strongly. Current expenditure is currently growing by around 23 per cent, which is way too high for an economy that will experience nominal GDP growth of around 12 per cent this year. Such growth is hardly consistent with a man who has set himself up as a paradigm of fiscal virtue. Growth of this magnitude is totally unacceptable at this stage or indeed any stage of the economic cycle. Despite the health of the public finances, it is amazing how quickly they could deteriorate in the event of a sharp slow down in the economy. Consequently it is essential that spending be brought control, because as you well know, it is very difficult to curb expenditure in the event of a sharp slowdown in growth. Health and education should be the two areas of priority, but merely throwing money at the problems in these areas will not make them go away. In fact, there appears to be an inverse relationship between health spending and the quality of health service. You should initiate a root and branch examination of every penny spent in the health service. Indeed in all areas of public spending, value for money should be the key guiding principle. Please exercise stringent control over all of the key spending departments and don’t waste any more money on the GAA or any other sporting organization for that matter.

Capital Gains: The reduction of Capital Gains Tax to 20 per cent was one of your more inspired moves since you took over the portfolio. If you are tempted to tinker with this particular tax heading, then a reduction to 15 per cent would be desirable.

Cigarettes and alcohol: Do not seek to remove cigarettes and alcohol from the Consumer Price Index as they are legitimate forms of consumer expenditure and should be included in the accepted measure of inflation. By all means feel free to increase duties on both items, as they are social evils, but don’t seek to hoodwink the consumer.

Childcare: Other areas of attention in the budget should include childcare - which is in total crisis - and as an avid cyclist I would appreciate initiatives that might encourage employers to provide adequate facilities for those who want to cycle to work.

In conclusion, please introduce a boring budget and don’t go for heroics in what will probably be your last budget. A prudent approach to the public finances is required at this stage of the cycle and not the sort of fiscal profligacy that you demonstrated last year.

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