OPTIONS FOR BUDGET 2006 

• Irish GDP for 2005 likely to hit 4.6%
• Irish GNP will come in at 4%
• 2006 another challenging year for exporters
• Consumer spending will remain strong in 2006
• Minister has considerable scope to expand spending and deliver some tax stimulus in 2006

Speaking at the launch of the Quarterly Economic Outlook, Jim Power, Chief Economist, Friends First said: "Childcare is likely to be the headline grabber this year, just as disability was last year and decentralisation was the previous year. How much the Minister gives away in increased spending will be determined by his targeted deficit. He can afford to give anything up to €2.5 billion away which allows for a very generous budget day package." 

Budget 2006 is the first real opportunity we will have to see where Minister for Finance, Brian Cowan’s economic priorities lie, Jim Power, Chief Economist, Friends First, told delegates attending the Quarterly Economic Outlook in Dublin today.

According to Mr Power, the economic and social policy objectives of the forthcoming budget are likely to focus on maintaining economic stability, maximizing employment creation, improving the competitiveness of the economy, childcare provision, as well as the improvement of essential public services and the welfare of the disadvantaged in society.

To achieve these objectives it would be desirable to have minimal changes to indirect taxes, full indexation of tax bands and allowances in order to offer much needed assistance to low and middle income workers. A significant spending package would be required to address areas of social concern and to improve the quality of public services. However from a political perspective the top priority has got to be a significant package aimed at relieving the burden of childcare.

Commenting on the childcare issue, Mr Power said: "Childcare must be made a fully tax allowable expense at the marginal rates. The individualisation of the tax system succeeded in encouraging many women back into the work force. The number of women in the labour force has increased by 300,000 in the last decade. However many of these women are now under pressure. As families struggle with high mortgages and high child care costs, measures must be taken immediately to make childcare more affordable.

On the supply side, Mr Power called for the continuation of capital grants for the sector but added that Government must also take a role in price regulation to ensure that tax incentives do not lead to price inflation in the sector.

Mr Power welcomed the broad thrust of the Transport 21 initiative as announced last week. "Such investment has to be welcomed because public infrastructure and transport infrastructure will have a key bearing on the capability of the Irish economy to deliver in the long term.

"However it is essential that the plan is carefully monitored and fully implemented on time and within budget. Those who are responsible for the implementation of the plan must be held accountable."

The abolition of the Groceries Order could lead to serious damage to the Irish retail landscape. "This is inconsistent with the objectives of more balanced regional economic development," according to Mr. Power. "However, before we come to any definitive conclusions, we need to see what changes will be made to the Competition Act."

Commenting on the labour market, Mr Power said job creation remains strong with the Quarterly National Household Survey reporting 93,000 jobs created in Q2, a growth of 5.2%. Employment is now at record levels and Ireland’s unemployment rate is the lowest in Europe.

"Momentum remains reasonably good but the challenges to future prosperity are becoming more evident at a rapid pace. Manufacturing activity continues to be subject to unprecedented international competition. The weak corporate tax receipts would suggest that it is the smaller companies whose margins are under most pressure. It is essential that the environment for such companies remains as competitive and business friendly as possible.

"The recent increase in industrial unrest in the state sector is not consistent with these objectives and if it continues would do serious damage to the Irish economy – this would be in nobody’s long term interest."

In relation to the housing market, it is clear that demand has continued unabated in 2005 with mortgage credit growing strongly. It appears that house prices will grow by 8% this year.

"Looking to 2006 the market seems set to remain very vibrant with prices expected to increase by at least 5%. The OECD’s reported suggestion that the market is over valued by 15% is quite irrelevant in an environment where the fundamental forces driving demand remain so strong."

However Mr Power was strongly critical of the current stamp duty regime. "The tax take from stamp duty continues to grow strongly. It has become one of the largest taxes faced by many Irish taxpayers. It is my view that the stamp duty regime is way too onerous and is acting as a serious impediment to greater mobility within the Irish housing market."

Finally on pension coverage, Mr Power said it was disappointing that no initiatives have been taken by Government to encourage the retention of SSIA money into the longer term savings market. "This is clearly a missed opportunity and one which Government will regret in time as people go on a €16 billion spending spree in 2006 and 2007."