The Economic and Social Research Institute is recommending that the Government increase the national debt by almost €4 billion in the budget rather than engage in large scale spending cutbacks or tax increases to balance the public finances. The recommendation is contained in the latest quarterly commentary from the Institute.
The commentary also urges to the Minister for Finance to stop savers increasing their contributions to the Special Savings Incentive Account scheme.
The ESRI takes the view that the current slowdown in Ireland's economic performance is a temporary phenomenon even though it expects the current below trend growth phase to last throughout next year.
The consequence is that tax revenue growth will be relatively limited and pressure on the public finances will continue into 2003.
One response would be for the Government to react by raising taxes on income and goods, and also introduce harsh cutbacks in departmental spending, all in a bid to re-balance the public finances. But the ESRI believes that this options does not provide the best solution and that, given the state of the economy, it could be counterproductive.
The most important thing, according to the Institute, is that control is re-exerted over Government spending to bring it back into line with the growth in tax revenue.
If this is done then the institute is recommending that the Government run up the national debt by at least €3.7 billion next year.
The ESRI also says that if any element of the benchmarking pay awards for public servants is to be paid then the borrowing level could be substantially more than €4 billion.
The ESRI also wants the Minister for Finance to refrain from any new structural changes to the tax system - such as those caused by individualisation of the tax bands, the introduction of tax credits, or the changing of the tax year to a calendar basis.
The problem with such changes is that they make tax forecasting too uncertain and that would not be helpful to the public finances now.
Instead the Institute wants the Government to introduce a neutral budget next month - one in which tax credits and bands, as well as welfare payments, are indexed to inflation - a move that would cost the Exchequer €1 billion in 2003.
The ESRI is still unhappy about the operation of the Government's Special Savings Incentive Account scheme.
At the moment this is set to cost the Exchequer €500m per year. But if all participants increased their contributions to the maximum the cost would rise to €900m at a time when our public finances are under strain.
The Institute is recommending that the Government moves to prevent savers from increasing their monthly contributions to the savings scheme in order to cap the Exchequer's financial exposure at current levels.
