€800m adjustment ‘enough’ to hit next year’s deficit target

Nevin institute says improving conditions make €2 billion adjustment unneccessary

Nevin institute director Tom Healy. Photograph: Paula Geraghty

Nevin institute director Tom Healy. Photograph: Paula Geraghty

Wed, Jun 25, 2014, 08:44

A budget adjustment of just €800 million would be enough to hit next year’s deficit target of 3 per cent, the Nevin Economic Research Institute has said.

In its latest quarterly outlook, the trade union-backed think tank said improving economic conditions would enable the Government to implement budgetary cuts of less than the previously-predicted €2 billion.

This contradicts the independent Fiscal Advisory Council, as well as the IMF and the European Commission, all of which have urged the Government to stick to the €2 billion target.

The institute warned that another tough budgetary consolidation risked depressing domestic demand even further, which would delay economic recovery.

Inconsistent

It also claimed that more cuts to public spending were inconsistent with the goals of job creation, economic growth and poverty reduction.

In its report, the institute predicted the economy would grow by 2.1 per cent this year and 2.9 per cent in 2015, which is broadly in line with the Department of Finance’s own predictions.

Economic growth would be fuelled by an increase in domestic demand, underpinned by an increase in personal consumption and investment.

The institute predicted unemployment would fall from its current rate of 12 per cent to 11.5 per cent this year and to 10.7 per cent in 2015.

While the State’s public finances remain fragile, it said a “do nothing” stance in the upcoming budget would be insufficient to restore the public finances to a sustainable path.

Wealth tax

Instead, it advocated a fiscal adjustment of €800 million composed mainly of increases in Government revenue, achieved through tax expenditure reforms and the introduction of a wealth tax.

This would be enough reduce the budget deficit to 2.5 per cent of gross domestic product next year, comfortably inside the troika-agreed target of 3 per cent.

The institute also called for a modest increase in social spending as part of a social emergency fund targeted at the most vulnerable individuals, with part of the fund reserved for spending on social housing.

Noting public spending was already low by EU standards, it called for accompanying “off-book” investments that restore public investment to the EU average in 2015.

“There is no room for tax cuts in Budget 2015 without causing further harm to public services or the goal of reducing the deficit. Ireland is still running a substantial deficit in its public finances and is carrying a high level of outstanding debt,” the report’s lead author Dr Tom McDonnell said.

“Budget 2015 should focus on public investment, reform of tax expenditures and measures to redistribute excessive returns on capital,” he added.

Neri director Dr Tom Healy also the institute’s research showed that there is a strong case for increasing the overall level of public capital investment to help address demographic pressures and the current crisis in social housing.