ESRI upbeat on domestic demand and urges neutral budget

With Budget 2015 less than a week away, the Government has received the blessing of the Economic and Social Research Institute for a "neutral" fiscal plan in which there would be no net rise in taxation and no further cutbacks.

The ESRI diverges with the Government on the policy front. It would prefer a big social housing investment to income tax cuts. But the institute still says the eventual economic out-turn will not be dramatically different if the Government does not change course.

Whereas the budget will be predicated on a forecast of 3.6 per cent gross domestic product growth next year, the ESRI is a good deal more optimistic. It forecasts that GDP will expand by 5.3 per cent in 2015 and says gross national product, which it believes to be a superior measure, would advance by 5.2 per cent.

All told, the institute’s assessment is upbeat. “The recovery in Ireland is broad-based and is stronger than previously thought,” said David Duffy, report co-author.

The early phase of recovery was export-based. Like the Central Statistics Office and the Government, the ESRI believes the ongoing growth spurt is now backed by a recovery in domestic demand. Although the institute is concerned about increasing weakness in the euro zone economy, Ireland remains a big beneficiary of the turnaround in Britain and the US.

Other voices

Bodies such as the Fiscal Advisory Council and the European Commission have called on Minister for Finance Michael Noonan to proceed with the €2 billion retrenchment foreseen in the original plan.

However, the ESRI believes a neutral plan would deliver a 2.1 per cent budget deficit in 2015. That would be well below the preordained 3 per cent required to meet European obligations. The ESRI says this would be sufficient to demonstrate an appropriate level of fiscal vigilance to the world.

After years of grinding cuts, the “optimal” course is to avoid taking more money out of the economy.

“Our policy recommendation is that the budget should be fiscally neutral in stance and that essentially has been brought about by the improved exchequer receipts and the pick-up in economic activity,” said Kieran McQuinn, ESRI associate research professor.

The institute believes the Government should pursue a similar strategy in the following two years, arguing this would be enough to deliver a small budget surplus in 2016 and a slightly larger surplus in 2017.

This assumes no shocks or accidents. Yet if the Government’s current masterplan was always to balance the budget in 2018, the ESRI’s outlook indicates this could come within grasp fully two years earlier.

McQuinn would not say whether the Government was wrong or unwise to plan tax cuts. But he did point out that the exchequer would still run a deficit next year and made the case a big social housing project would stimulate growth in its own right, and tackle the shortage in social housing and the requirement to build up the housing stock more generally.

“We clearly recognise there are certain taxation measures or issues which need to be addressed but, at this point in time, our assessment would be to follow an investment route rather than taxation,” he said.

Focus on growth

“I think any policy that is taken at this point in time should have as its central concern the need to keep the growth rates moving along. The recovery is still somewhat early and nascent in nature so, therefore, any measures which are undertaken should focus on growth.”

He further argued investment has been shown to deliver a larger multiplier effect than measures which simply boost consumption. He also made the point that sustained growth would reduce the proportion of the national debt vis-à-vis economic output, thereby improving prospects of bringing Ireland’s debt dynamics into a sustainable position.