Friends First says shortfall in tax may hit €1bn

The growing shortfall in tax revenues could create a €1 billion hole in the public finances before the end of the year, a leading economist warned yesterday.

Mr Jim Power, chief economist with Friends First, said the forthcoming Budget would be drawn up against "the most difficult economic background in at least 15 years".

He said the Department of Finance's estimates of a €500 million shortfall in tax revenues for 2003 was conservative, predicting the gap would reach at least €750 million by year-end as all aspects of the tax take come under pressure.

Mr Power expects the Minister for Finance, Mr McCreevy, to take advantage of the declining inflation rate by raising service charges and raising taxes on "old reliable" goods such as alcohol and tobacco in December's Budget.

The non-indexation of tax bands will also be used as a means to plug the gap in Exchequer income, he believes.

At the publication of the Friends First Quarterly Economic Outlook, Mr Power described the payment of benchmarking awards in such a situation as "economically suicidal".

Benchmarking will ultimately lead to a heavier tax burden at a time when the Republic's competitiveness is being squeezed, he said.

Mr Power has shaved his forecast for growth in gross domestic product this year from 3.8 per cent to 3 per cent.

He has cut his expectation on gross national product growth from 1.2 per cent to 0.8 per cent. Both forecasts are subject to downside risks since they are "very heavily predicated on an international economic recovery", Mr Power cautioned.

He urged the Government to focus on domestic competitiveness by addressing problems with the State's infrastructural network, education system and IT capabilities.

Mr Power agreed with last week's recommendation from the Economic and Social Research Institute (ESRI) that payments to the National Pensions Reserve Fund should be diverted into infrastructure, provided that value for money could be guaranteed.

Infrastructural improvements will be required if the Republic is to attract high-value foreign investment in the future, says Mr Power.

He is expecting the Irish unemployment rate to rise close to 6 per cent over the coming year as public-sector employment stops growing and tighter margins in the manufacturing sector lead to further job losses.

"We cannot depend on a low corporation tax rate to save the Irish economy," he said, calling for greater deregulation and competition across the economy.

Mr Power does not support changes to the Groceries Order or a removal of restrictions on retail space, however. He believes Irish consumers would be ill-served by "monster superstores", claiming that such developments would not necessarily result in lower prices or greater choice.

This view was disputed yesterday by Competition Authority chairman, Dr John Fingleton, who said it did not make sense for one section of the economy to have its own planning laws.