Irish Economy
Irish Economy 2015: ESRI slams return to boom-time pro-cyclical fiscal policy
By Michael Hennigan, Finfacts founder and editor
Jun 10, 2015 - 6:40 AM

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Irish Economy 2015: The Economic and Social Research Institute (ESRI) says today that "an expansionary budgetary policy is not advisable and does suggest that the government is adopting a pro-cyclical fiscal policy. While there was little alternative in the aftermath of the financial crisis to a contractionary, pro-cyclical fiscal policy, given the state of the public finances, it is regrettable now, once we have discretion in terms of the policy choices available, that such a course of action has been signalled."

The Government plans to add €1.5bn to the economy via tax cuts and spending rises in next October's Budget 2016.

Economic growth is expected to be strong in 2015 and 2016 and in the Quarterly Economic Commentary, Summer 2015, published today, the authors predict a growth in GNP of 4.2% in 2015 and of 3.6% in 2016. Declines in unemployment are also expected, with the headline rate envisaged to fall to 8.3% in 2016, down from 9.9% at present.

The forecast for housing completions to 13,000 and 15,000 units in 2015 and 2016 respectively compared with 93,000 in 2006.

Speaking about the report, Kieran McQuinn (ESRI) said “We continue to believe that the Irish economy will grow quite strongly in both 2015 and 2016. Notwithstanding the poorer than expected performance of both the US and UK economies in the first quarter of 2015, most domestic indicators, including taxation receipts, indicate that the recovery in economic performance is still very evident in the Irish economy.”

QEC co-author, David Duffy (ESRI) continued “We expect that the domestic economy will make a major contribution to growth in 2015 and 2016. 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 to below 100,000 by the end of 2016.”

A research note, published with the QEC, re-examines the “pass-through” relationship between the European Central Bank (ECB) policy rate and the standard mortgage variable rate (SVR) charged by Irish credit institutions. The issue has attracted renewed interest in recent times owing to the continued observed difference between the SVR and the rate of interest charged on other variable rate mortgages in the Irish market.

“Standard Variable Rate (SVR) Pass-Through in the Irish Mortgage Market: An Updated Assessment” by Kieran McQuinn and Ciara Morley (ESRI) updates some of the empirical work conducted by Central Bank researchers Goggin et al. (2012). 

Commenting on the results in the Note, Kieran McQuinn, a co-author, said “In updating earlier work, we establish that the relationship between the ECB policy rate and the SVRs in the Irish market has weakened further since 2011. Previous work has suggested two main reasons for this growing divergence - the current lack of competition in the Irish banking sector and the ongoing impaired nature of certain aspects of domestic institutions’ balance sheets.”

McQuinn continued, "The SVR issue would appear to be symptomatic of wider issues concerning the present state of the Irish banking sector. With negative growth rates for credit across all sectors of the Irish economy, the question is whether the sector, as it presently stands, can meet the needs of the recovering economy. As such, the emphasis now should be on policy measures which increase the prospect of competition in the domestic banking market. Ultimately, this has particular relevance for what and when the Government decides to do with the taxpayers’ stake in the different institutions.”

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