Tax cuts in next month's Budget should be targeted at the lower paid, rather than offering relief to people on higher incomes, the Economic and Social Research Institute (ESRI) has urged.
In its latest quarterly commentary, published today, the ESRI urges the Minister for Finance, Mr McCreevy, to direct tax relief at lower paid workers through increasing personal allowances, rather than cutting the top 48 per cent rate of income tax. It is essential to help the lower paid in order to make it more beneficial for people to move from unemployment into work, it says.
This week's Estimates of spending for next year indicate that Mr McCreevy will be able to spend £400 million on tax reductions, while still keeping the Exchequer finances in surplus.
The ESRI report also predicts Ireland's strong economic performance will continue into next year. Gross National Product should grow by 7.75 per cent this year and 6.75 per cent in 1998, it says, and employment should continue to rise strongly. Inflation will remain moderate, running at about 2 per cent next year.
Meanwhile, figures published yesterday show a moderate rise of 0.2 per cent in consumer prices for last month. The latest inflation figures from the Central Statistics Office show the consumer price index rose by just 1.2 per cent over the last 11 months. The Government welcomed the figures, saying inflation here remained the lowest in the EU.
The ESRI warned that the problem of skills shortages will have to be addressed if economic growth is to be maintained. And the institute says there is a strong economic rather than a political case for tax cuts to be designed to reduce the very high marginal tax rates at low income levels, "rather than the less excessive marginal rates on high incomes".
The ESRI says this and future budgets should concentrate on increasing basic personal allowances. At the same time, it says, budgets should revive the process of shifting child benefits towards a taxable entitlement. Such measures, it says could contribute significantly to the sustainable long-term growth of the Irish economy by making it more attractive for people to move from the unemployment register into work.
The 1998 Budget should be prudent and aim for a surplus on the Exchequer finances, according to the institute, but says care should be taken that the Government be seen to fully honour the tax reduction commitments of Partnership 2000.
At the lower skills end of the market, the ESRI says despite high levels of unemployment, many firms are reporting difficulties in recruiting semi-skilled or unskilled personnel, "in some cases this may well be due to the offering of uncompetitive wages or otherwise unsatisfactory working conditions".
It says there still seems to be a problem for firms who are offering standard industry rates of pay. The financial incentive for people to move from unemployment into low skilled work can be very low and "can operate as a powerful disincentive to work", it says, particularly for older, married people.
The ESRI says more focus must be put on raising the skills of the unemployed and greater effort is needed in placing them in sustainable jobs. It says if this were done then it would justify some tightening of the job-seeking criteria for drawing unemployment assistance "which would not have been legitimate in the past when jobs were simply uneffective".
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