Ireland will move to becoming a net contributor to the EU over the next four years, increasing pressure on the public finances, according to new research from Goodbody Stockbrokers.
The days of budget surpluses " are part of economic history" according to the report's author, Mr Colin Hunt, who said politicians must realise that economic recovery would only bring limited benefits to the exchequer.
The research is based on the impact of enlargement, under which 10 countries will join the EU next year and Bulgaria, Romania and possibly Turkey may join around 2007. The enlargement of the EU and Ireland's increasing wealth means, according to Goodbodys, that we are likely to become a net contributor to the EU by 2007.
EU funding from CAP and structural funds has already fallen significantly in recent years, but the exchequer will still benefit to the tune of €1.5 billion this year. Goodbodys estimate that by 2007 we will be making a net contribution to EU funds of about €1 billion. Meanwhile, the exchequer will also come under pressure to fill the financing gap left by lower EU receipts in areas such as agriculture.
"Enlargement may be positive for the economic environment, but it is going to add to the exchequer's existing financial difficulties," the report says.
The changing financial relationship with the EU is one of the factors which will keep the public finances under pressure for the foreseeable future, according to Mr Hunt, Goodbody's chief economist, speaking at the report's launch. There was a general belief that a " wall of cash" would benefit the exchequer once the economy started to recover, allowing for policy to be loosened before the next election. This would not happen, he said.
"The economy might feel better, but the exchequer won't feel any better," he said. This meant that Government would need to control current spending and find new ways of paying for infrastructure, such as greater use of public-private partnerships or raising money from privatisations.
Mr Hunt , a long-time critic of public pay benchmarking, said that this cost would be another factor putting a significant burden on the exchequer for the foreseeable future. The Government should only pay the money in return for the actual delivery of greater productivity, he said, not just unspecific promises.
The Goodbody analysis of enlargement said that it would create significant potential trade benefits, while also bringing new competition for foreign direct investment. Many of the accession states were already cutting corporation taxes and would provide stiff competition for inward investment, the report says. Ireland cannot compete on wage levels with most of these countries - the hourly wage in the Baltic states, for example is between €1 and €1.50 per hour, it is about €17.50 per hour here.
While this will create stiff competition for lower value investments, Ireland can continue to attract higher value projects provided we retain our commitment to the 12.5 per cent corporate tax rate, the report says. However with low tax rates on offer elsewhere in central and eastern Europe, the turnover of projects will also increase, meaning that the average life-span of a multinational here could shorten as increasingly higher value activities move east over the years.
There is significant potentialfor trade. Ireland has the weakest trade lwith the applicant states of any existing member state, with just 1.3 per cent of 2002 merchandise exports . There is potential for this to grow, with Ireland already running an annual trade surplus of €371 million with these countries.
