No further cuts needed to hit deficit target - Goodbody

The Irish economic recovery has gained momentum over recent months, meaning that no new austerity measures will be needed to hit the government's 3 per cent deficit target for 2015, Goodbody Stockbrokers said this morning.

Noting that a host of indicators suggest that the recovery is gaining strength and becoming more broad based,Goodbody said it believes that the Government can reach the “hallowed ground” of a sub-3 per cent of GDP budget deficit in 2015 with no net additional austerity measures.

Notably, the water charges that have already been announced will bring in € 500 million, “leaving scope for the Government to focus on measures that improve medium-term growth capacity, including a reduction in the income tax burden and the reversal of some of the capital spending cuts of recent years” the broker said.

Goodbody expects GDP growth of 3.5 per cent a year over the next three years, with domestic demand growing by 2.9 per cent this year and 3.1 per cent in 2015. Unemployment is forecast to fall to 10.7 per cent by the end of this year, and to 8.5 per cent in 2016.

Dermot O’Leary, chief economist, said Goodbody said: “Our preference is for Government to implement measures that will increase the medium-term potential of the economy. These should include a widening of the income tax bands; a reduction in the higher rate of tax, which, including the universal social charge, is one of the highest in the EU; and a refocusing on capital expenditure, which has collapsed over recent years and remains at its lowest since the late 1980s as a percentage of GDP”.

Mr O’Leary would also like to see an early repayment of IMF loans, noting that there are significant savings to be made by such a measure, given that the debt currently attracts an interest rate of 4.99 per cent.

“Our preference would be for the NTMA to go beyond its traditional 10 year time frame in refinancing these loans in the market with interest savings of c.€ 340m per annum a possibility,” he said. Ireland’s cost of funding in the bond markets fell to another record low this morning, with 10-year Irish bond yields touching 1.924 per cent, the lowest on record.

On the property market, Goodbody says supply shortages are the key driver of recent acceleration in both residential and commercial property prices. While there are signs that construction activity is rebounding, supply will continue to be a problem, pushing prices higher.