A top figure in the Economic and Social Research Institute has warned against tax cuts and increased public expenditure in next month's Budget. He also warned of the danger of a bubble in the property market, fuelled by inflationary expectations. Prof John FitzGerald says that, given the high rates of inflation in the labour and property markets, it would be unwise to loosen fiscal policy in the Budget.

Addressing an Irish Association of Pension Funds conference in Dublin yesterday, Prof FitzGerald said tax cuts of £500 million (€634 million) in the Budget would increase property prices by at least 3 per cent. The conference heard that wage and property inflation were a more serious cause for concern than inflation in the consumer price index.

"Alan Greenspan does not worry about the rate of inflation in Wyoming, so why should we worry about the rate of inflation in a region of the euro zone?" Prof FitzGerald said. He added that regions within a monetary union experiencing convergence and above-average growth would experience above-average inflation. This was because productivity in the economy, associated with higher growth, would lead to higher wage increases, he said. Prof FitzGerald also said that, as the prices of tradable goods were disciplined by market forces, they could not move significantly out of line with prices in other euro-zone regions.

In relation to property inflation, Prof FitzGerald said the main danger was that rapid increases in domestic property prices, fuelled by inflationary expectations, could create a bubble. The pricking of such a bubble by an external shock could have serious consequences, he said.

With interest rates and exchange rates now being controlled by outside factors, Prof FitzGerald said the key Government instrument was fiscal policy. He added that fiscal policy was less effective than monetary policy in controlling inflation in property markets but was still potentially effective.

He said further income tax cuts in the Budget and increased public expenditure would place greater pressure on wages and prices. Prof FitzGerald added that wage expectation may build up a higher rate of inflation than in partner regions, which could lead wage rates to overshoot their appropriate level, leaving Ireland uncompetitive and very exposed.

"When the economy has slowed down and is less capacity-constrained than it is today, some combination of tax reductions and increased expenditure could prove much more beneficial to individual citizens than they will today."

Also speaking at the conference, the chief executive of the Pensions Board, Ms Anne Maher, told delegates the Pensions Bill, due to be published early next year, would include improvements in member protection.

She said the Bill may include provision for a compensation fund for members of pension funds that get into difficulties. She said it was also likely that there would be changes relating to the ownership and treatment of fund surpluses.