The economy can continue to grow at 5 per cent annually over the next five years, according to new forecasts from the ESRI, the Economic and Social Research Institute. However, the ESRI's medium-term review, published today, warns the Government that it should not introduce major tax cuts in the December Budget, advising it instead to promise significant reductions when economic growth slows in a couple of years.
The review, full details of which are in a special supplement published with today's Irish Times, forecasts that economic growth will gradually slow in the years ahead, with gross national product rising by almost 6 per cent next year and growth averaging just over 5 per cent in the period 2000 to 2005. This will increase the level of income per capita in the Republic to the EU average by 2005, by which time the economy will have reached "full employment", with the unemployment rate hovering around 5 per cent.
The strong performance in the jobs market was demonstrated by CSO figures published yesterday, which showed an increase of 96,600 in the number of people at work in the year to this April, the second-highest annual increase on record.
With growth remaining very strong - as the jobs figures show - the ESRI recommends that the next two budgets should be tight. This would allow the Government to spend more and cut taxes when growth starts to slow down and also provide a strong Exchequer surplus to fall back on if the economy hits unexpected difficulties.
According to Prof John FitzGerald, research professor at the ESRI and one of the report's authors, once the economy slows down there could be major cuts in taxation over a period of years.
"Significant tax cuts this year and next mean any hard landing will be even harder and it increases the chances of a hard landing," he said. "In the end the Government will have to give money back to the people. But the people are not saving at the moment so the Government should save it for them and then give it back once they are saving again in a couple of years."
Major reforms of the tax structure are also required, the report argues, advising the Government to consider increasing corporate taxes in the medium term and also to introduce a new carbon tax and environmental charges.
The ESRI renews its call for a major programme of investment in infrastructure - including roads, public transport and water services - ahead of the publication of the Government's National Development Plan. A renewed social partnership which guarantees a significant dividend to all citizens is also essential, it says.
Provided the Government avoids major policy mistakes and there is no downturn internationally, the economy is in for a few years of robust economic growth, according to the forecasts. After an increase of 7.9 per cent in GNP last year, growth is expected to slow to 6.3 per cent this year and 5.8 per cent in 2000. It will then fall back gradually to 5 per cent by 2005.
Increasing prosperity means after-tax wage levels should rise by about 3 per cent a year above the rate of inflation over the next decade, almost 1 per cent higher than in the 1990s. Social welfare benefits should be indexed to wages growth so that the elderly and others do not get left behind, it says, while social housing is identified as a key area requiring investment.
The ESRI has estimated that strong growth will continue to translate into high Budget surpluses, giving the Government scope for major investment as well as tax reductions and higher spending in the years ahead.