ESRI issues warning over plans for budget tax cuts

The Economic and Social Research Institute (ESRI) has questioned the Government’s push for fresh tax cuts in the 2016 budget – its final budget before the election.

Weeks ahead of the “spring economic statement”, in which the Coalition will present an outline programme of tax and spending measures for years to come, the ESRI says budgetary steps may soon be required to prevent the recovering economy from overheating.

The Coalition has already pledged further income tax cuts next year, and talks with public sector unions on “pay restoration” are expected before the summer.

Such moves would necessitate an expansionary budget in 2016 along the lines of the 2015 plan, which delivered modest tax cuts and spending increases.

However, Prof Kieran McQuinn of the ESRI said the “optimal” course was to adopt a neutral budget for 2016 with no net change in tax or spending. This could deliver a budget deficit close to zero. “Looking at the rates of growth – looking at the way the economy is performing at this point in time – we think that kind of fiscal neutrality [is the] kind of budgetary strategy which . . . should be pursued this year and probably next year,” he said.

Targeting surpluses

“For 2017 – if the economy grows very strongly next year – then I think there’s grounds for saying you should almost start targeting surpluses at that point in time if there is too much heat in the economy.”

The think tank believes the new Central Bank mortgage caps to prevent another property bubble were mistimed, arguing they will constrain the supply of new housing and drive rents higher.

It forecasts GDP growth of 4.4 per cent in 2015 and 3.7 per cent in 2016, and GNP growth of 4.1 per cent in 2015 and 3.5 per cent in 2016. It predicts unemployment will drop to 9.7 per cent this year and 8.4 per cent in 2016.

Central Bank plan

The deficit is forecast to ease to 2.3 per cent of GDP in 2015, with a 0.3 per cent deficit possible in 2016 in a neutral budget scenario.

Speaking about the Central Bank plan, Prof McQuinn said the property market was just about emerging from complete shut-down. He said: “The danger with these measures is that this is a further contractionary series of policies being brought in on top of that.

“They’ll result in fewer houses being supplied, lower prices and less loans being issued than would otherwise be the case.”

The ESRI said national house prices were still “somewhat” undervalued. It also questioned why loan conditions for first- time buyers were more liberal.