The Government should not reduce the higher income tax rate in the Budget, according to AIB. The bank's chief economist, Mr John Beggs, says the inflation rate will remain "relatively high" next year unless there is a significant rise in the euro's value or oil prices decline by more than expected. Mr Beggs expects the Republic's average inflation rate to reach 5.6 per cent this year, still the EU's highest, before falling to 4.3 per cent next year.
On income tax, Mr Beggs says the Government should keep the higher rate of 44 per cent, but plan a staged reduction to 40 per cent by 2004. The standard rate should be reduced to 20 per cent from 22 per cent, he says.
Government policy is to lower both rates, although Mr Beggs's counterpart at Bank of Ireland, Mr Jim Power, has also advised against cutting income tax.
In his latest quarterly analysis published today, Mr Beggs says much of the Republic's current inflation rate is generated abroad, but adds that it could cause "second-round" price rises in the domestic market next year.
This would erode cost competitiveness "far beyond" the level likely to affect a soft landing from the record rates growth recorded in recent years.
On the euro, Mr Beggs expects the currency to rise towards parity with the US dollar next year and higher interest rates, which he expects to rise by a further 0.5 of one percentage point.
Monetary conditions since the currency's introduction were "inappropriate" to the current stage of the State's economic expansion.
Given the inflation risk, Mr Beggs says the Government should reassert authority over fiscal policy. He adds: "The social partners must accept that in a gain-sharing environment which the PPF has become, much of Ireland's current inflation problem is beyond our control. Attempts to force the Government to compensate everyone for externally generated inflation would be extremely counter-productive."
On indirect taxes such as VAT, Mr Beggs says reductions may not lower inflation because suppliers may not cut their prices. He adds: "A reduction in the consumer price index from say 6 per cent to 5 per cent is unlikely to influence pay claims in the private sector, which are now driven by the strength of the economy and the tightness of the labour market."
The introduction of tax credits and the individualisation system should be continued, he says.
In view of his stance on tax, Mr Beggs says the Government must seek to curtail the growth in public spending more than in recent years.
A likely slowdown in growth next year to 7.5 per cent from the likely rate this year of more than 10 per cent would reflect slower employment growth due to a shortage of labour supply and a slower rise in disposable income.
House prices will continue to rise sharply next year, he says.
