The Government should postpone tax cuts for two years to ease inflation, Bank of Ireland said yesterday.
Its chief economist, Mr Jim Power, also said the euro was unlikely to fall further, but would not rise significantly either. This meant the European Central Bank would increase interest rates to 5.5 per cent from 4.75 per cent by mid-2001.
While Mr Power expected the Minister for Finance, Mr McCreevy, to cut taxes by £1 billion (€1.27 billion) in the Budget, he argued the money would be better spent on childcare, health and education.
In an economic review suggesting wealth per person in the Republic could reach 115 per cent of the EU average by 2004, he said priorities had moved from reducing taxation.
For example, the greatest threat to the sustainability of growth was tightening of the labour market.
This problem should be countered by increased immigration. While there was scope for more participation in the workforce by Irish women, this was limited by a shortage of childcare services.
"Going forward I would like to see taxes lower, but it would be advisable to postpone tax cuts," said Mr Power. "The political reality is that he [Mr McCreevy] is going to cut tax."
Mr Power predicted a 2 percentage point cut in the standard and higher personal tax rates in the Budget, releasing £650£700 million into the economy. Likely cuts in indirect taxation - probably including a 2 percentage point cut in VAT to 19 per cent - would release a further £300 million.
Such cuts - and rising wages due to the labour shortage - would keep pressure on inflation, he said. The monthly rate would reach 7 per cent before the end of the year and the annual rate for 2000 would be 5.7 per cent, Mr Power said.
A fall to an annual rate of 5 per cent was likely next year. Speaking before oil prices rose sharply yesterday, he said the marginal decline in inflation next year would be due to lower fuel prices and a more stable exchange rate environment.
"Overheating does not necessarily mean that the bubble is going to burst. Inflation will act as a safety valve. I expect inflation to move us from being super-competitive to euro-zone norms within two or three years."
GDP growth would reach 10.7 per cent this year, falling to just below 9 per cent next year. Growth falling to 5 per cent next year would indicate a "hard landing" - there was 1520 per cent chance of this, Mr Power said.
On the euro, he said continuing growth in the US economy next year would underline the dollar's strength. Policy differences between the presidential candidates Mr Al Gore and Mr George Bush Jnr were "cosmetic", he said. The vote in Denmark against joining the monetary union would postpone the entry of Britain and Sweden, but intervention supporting the currency before the referendum had sent a signal to the market that the ECB would not allow it to fall further. Even so, Mr Power said the market still questioned the credibility of the ECB.
The central bank would increase rates to prevent overheating in the euro zone where growth was supported by export-led recoveries in Germany and Italy. But a sustainable euro-zone growth rate of 2.5 per cent contrasted with 3.5 per cent in the US, underlining why investors favoured the US over the EU.
