1980s-style budget required - ESRI

BUDGET 2009:HIGHER TAXES may be "unavoidable" if public services are to be maintained, the Economic and Social Research Institute (ESRI) said yesterday, as it advised the Government to implement its toughest budget since the 1980s.

The Government should raise €3 billion through severe cuts in spending and tax hikes in the budget, even though these measures will drag the economy further into recession, the ESRI said in its latest quarterly commentary.

The Government should aim to stabilise the general Government deficit at 5.5 per cent of GDP in Budget 2009, according to ESRI senior research officer Alan Barrett. "We need the public finances to be on a broadly sustainable path," he said.

"Ideally, it would have been preferable for the Government to avoid adding to the downturn through a fiscal contraction. However, given the poor state of the public finances and the uncertainties surrounding the prospects for the economy, we think that the 5.5 per cent level is prudent."

As this deficit would mean that the budget would have to be one of the most deflationary of the last quarter-century, the Government may settle for running a higher deficit, Mr Barrett said. The ESRI's illustration of how the Government could save €3 billion includes a 15 per cent cut in capital spending, unchanged expenditure on goods and services and a rise in the average personal tax rate from 19.5 per cent to 19.8 per cent.

"Whatever decisions are made in the short run, the longer-run situation with regard to tax increases will need to be reflected upon. Increased public spending was facilitated in recent years by property-related tax windfalls that are now drying up," the ESRI noted.

"Even when Ireland returns to its long-run growth path, it may well be the case that tax revenues are not sufficient to fund levels of public services which are (in some social sense) considered optimal."