Economist warns of tax rises as deficit looms

Tax increases will be inevitable if the Government cannot rein in spending, a leading economist said today.

It appears likely at this stage that we could be facing into an autumn and winter of discontent Friends First economist, Mr Jim Power

Friends First economist, Mr Jim Power warned today that the exchequer finances continue to be the most problematic area in the Irish economy.

With spending cuts looming across a number of Government departments and tax revenues down by 7.5 per cent, Mr Power said a deficit of €1 billion is likely.

According to Mr Power, control of public spending is now the key challenge facing Government and a failure to bring spending under control could result in the introduction of higher taxes by stealth.

Speaking at the launch of the Friends First Quarterly Economic Outlook, Mr Power said that inflationary pressures in the economy remain intense and reflect inappropriate fiscal and monetary policies adopted since 1999.

He pointed to price increases seen in June in health, now running at 10.2 per cent, recreation at 7 per cent, education 9.7 per cent, restaurants 7.3 per cent and other services 10.4 per cent.

"These rates of inflation are horrendously high and clearly indicate the inflation culture that has taken hold in certain sectors of the economy that are relatively insulted from competitive forces."

Mr Power also criticised the recently published benchmarking report. "The benchmarking report is a bit of a fiasco, given the failure to identify how the figures were reached. One can have little confidence that the process was as fair and scientific as might have been expected." He said it is far from certain that all trade unions will accept the proposals.

"It appears likely at this stage that we could be facing into an autumn and winter of discontent," he warned.

"There is now a clear risk that the Irish consumer will be forced to pay directly for benchmarking through higher taxes, reduced spending and higher Government charges," he added.

Friends First has downgraded its GDP growth prediction to 3.6 per cent from 4 per cent.

Mr Power said the Government must also ensure a Yes vote to the Nice Treaty in order to avoid an economic backlash from Europe.

He said a No vote would put a serious question mark over Ireland's future participation in Europe. "We have gone so far down the path of European integration at this stage a reversal would be very destabilising for the economy."