ESRI warns Coalition against €1.5bn budget boost

The Economic and Social Research Institute has urged the Government to pull back from its plan to expand the 2016 budget by up to €1.5 billion, saying such measures are not advisable amid “significant” growth in the economy.

In a new report, the ESRI also argued that the Government should consider a speedier sale of State-owned banks such as Allied Irish Banks (AIB) to stimulate competition in the mortgage market and lower borrowing costs.

“If the economy is growing at over 4 per cent this year and if it’s going to grow at 3.5 per cent next year on top of 5 per cent last year, then I don’t really think you need to step into the breach from the Government’s point of view,” said Prof Kieran McQuinn, co-author of the ESRI quarterly economic commentary.

“Whether it’s on the public finances front or whether it’s to do with the expansion of credit in the economy, it’s important we keep in mind the lessons of the past and ensure that we don’t get sucked into the kind of mistakes that were made in the run-in to 2007 and 2008.”

Progress

The ESRI report follows the spring economic statement in which the Coalition pledged to protect the progress made to secure stable public finances and steady economic growth.

“In the greater scheme of things, the €1.5 billion isn’t a massive amount of money, but nonetheless it is a principle at this point in time,” said Prof McQuinn.

“There is an opportunity next year to kind of put a greater emphasis on counter-cyclical policy behaviour in terms of how we run and how we deal with our public finances. So it is disappointing in that sense for sure,” he added.

“The Government has indicated the need to possibly run a surplus in 2018. . . There may actually be a need to run a surplus at an earlier date in order to take some steam out of the economy.”

The ESRI forecast comes after similar warnings last week from the Irish Fiscal Advisory Council.

Tax receipts

The ESRI said most domestic indicators, tax receipts among them, indicate that the recovery in economic performance is still very evident.

“We expect that the domestic economy will make a major contribution to growth in 2015 and 2016,” said David Duffy, report co-author.

“Having updated our estimates, we now expect the numbers of homeowners in negative equity to fall to approximately 160,000 by the end of this year and could fall below 100,000 by the end of 2016.”

This reflected strong growth in house prices, now estimated to have risen at a rate of 15 per cent in the year to March 2015.

The ESRI forecast a national average unemployment rate of 9.6 per cent this year, down from 9.9 per cent at present, and a drop to 8.3 per cent in 2016.

On Greece, Prof McQuinn said “Grexit” was a clear downside risk but that the impact might have been much more pronounced a few years ago.

“People will say we don’t have that much of a direct exposure to Greece. But we have direct exposures to a lot of people who have direct exposures to Greece.

“So there’s always the contagion factor there and that’s an immensely difficult network of relations to assess and quantify.”