Reverse budget plan of €1.5bn tax cuts and spending – ESRI

The Economic and Social Research Institute has called on the Government to reverse its plan for a €1.2 billion to €1.5 billion package of tax cuts and spending increases in the budget next month.

In a new quarterly forecast which said the rapidly expanding economy had no need for further stimulus, the ESRI said it would be better to pass a “neutral budget” with no fiscal expansion than the current plan.

Kieran McQuinn, ESRI associate research professor, said the Government should “leave well enough alone” in Budget 2016, although he accepted a full indexation of current policies would cost in the region of €700 million next year.

“When we have the strength of recovery that we have and when it’s as broadly based as it is – particularly even with personal consumption figures and estimates – then we don’t really see a compelling case for the Government to further stimulate economic activity,” said ESRI associate research professor Kieran McQuinn.

He said the proposed expansion was “not a huge amount” ultimately, but added that the Government still planned to run a deficit next year and said the debt-to-GDP ratio remained quite high.

Asked whether it would be better to redirect money earmarked for tax and spending measures in Budget 2016 toward debt repayments, he said that was one possibility.

Dr McQuinn was speaking as the ESRI said gross domestic product was on course to grow 6 per cent this year and 4.5 per cent in 2016.

Citing results from the ESRI’s “nowcasting” model, he said growth in the third quarter this year may have reached 1.68 per cent of GDP. The recorded growth rate in the second quarter of the year was 1.9 per cent.

Housing supply remained a crucial economy-wide issue, Dr McQuinn said. He went on to say the Government should exercise care in the policy response and learn lessons from past failures “particularly in terms of taxation policy”.

Ireland’s growth remains the fastest in the euro zone by a considerable margin, with the expansion of the German economy projected to remain below 2 per cent this year and next and Spanish growth exceeding 2 per cent only in 2016.

The ESRI expects Ireland’s budget deficit this year to ease to 1.8 per cent of GDP for 2015 and to drop to 1.2 per cent of GDP in 2016, both of which are lower than the latest public projections from the Department of Finance.

Although Minister for Finance Michael Noonan has said he expects the State to balance the books in 2018, Dr McQuinn said the possibility of a budget surplus was already emerging for 2017.

The ESRI said the recovery in domestic demand and the local labour market was continuing, with strong foreign demand for exports supported by growth in the US and Britain and the weakening euro.

However, forecast co-editor David Duffy said the euro-zone recovery still had a long way to go and added that the lack of acceleration in the growth constituted a downside risk.

As new figures showed Ireland’s unemployment rate dropped to 9.4 per cent in September from 9.5 per cent in August, the ESRI said it expected an average unemployment rate between 8.4 per cent and 8.5 per cent in 2016. By the end of next year, the ESRI expects the unemployment rate to reach 8 per cent.

Citing survey results, the institute said consumer sentiment was picking up. “Yes, there’s volatility in the series but the underlying trend there is improving,” said Dr Duffy.

After 2 per cent growth in consumption in 2014, consumption growth forecasts have been revised upwards to 2.8 per cent for 2015 and 3 per cent for 2016. Such increases reflected the rise in aggregate incomes, mainly due to employment growth. Dr Duffy said deleveraging continued to act as a drag on consumption.