Irish Economy: The ESRI (Economic and Social Research Institute) warns in its latest economic commentary that the Coalition should avoid vote-buying tax cuts in next October's Budget, which will precede a general election that is expected to be held in February or March 2016.
Economic growth is expected to be strong in 2015 and 2016, with Ireland's Gross National Product (GNP) forecast to grow by 4.1% in 2015 and 3.6% in 2016. In the Quarterly Economic Commentary, Spring 2015, published today, the ESRI researchers predict declines in unemployment with the headline rate envisaged to fall to 8.4% in 2016.
GNP mainly reflects the exclusion of the profits of the foreign-owned sector but it is distorted by foreign companies that become Irish for tax purposes.
The think-tank said domestic sources of growth increased in relevance through 2014 and it envisages continued strong contributions from investment, in particular, and to a lesser extent consumption in 2015. "In terms of the housing market, for example, we forecast 16,000 new housing units to be built in 2015, which is up from 11,000 in 2014. Investment, in general, is forecast to increase by just under 13% in 2015."
Kieran McQuinn, ESRI economist, said the Government should focus on policies to keep the recovery ticking over rather than any vote-buying tax cuts.
"The optimum strategy now is to keep things ticking along, don't rock the boat," he said.
The Government is seeking an easing in EU rules on spending and several members of the Government in recent weeks have lobbied the European Commission to provide leeway for tax cuts in advance of the general election.
McQuinn said yesterday that the “optimal” approach was a neutral budget for 2016 providing for no net change in tax or spending. This could deliver a budget deficit close to zero.
“Looking at the rates of growth — looking at the way the economy is performing at this point in time — we think that kind of fiscal neutrality [is the] kind of budgetary strategy which . . . should be pursued this year and probably next year,” he said and added: “For 2017 — if the economy grows very strongly next year -then I think there’s grounds for saying you should almost start targeting surpluses at that point in time if there is too much heat in the economy.”
The ESRI said on the public finances: “If the assumptions underlying our expectations for growth prove to be correct, then the Budget deficit should decline to 2.3% of GDP this year, with a further reduction to 0.3% in 2016. This represents a significant improvement in the public finances particularly when compared with the sizeable deficits that incurred in 2010 and 2011.”
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