€1.8bn savings enough to reach 3% deficit goal, says think-tank

A fiscal adjustment of €800m and a spending stimulus of €1bn in October’s budget would be enough to reduce the deficit below 3% by 2015, according to the Nevin Economic Research Institute.

The institute’s economist Tom McDonnell, says a €2bn budget adjustment could do damage to the economy, particularly in the delivery of key services such as health and education.

Over the past week, both the IMF and the European Commission have called on the Government to implement €2bn of budget cuts next October.

As part of the bailout programme agreed with the troika, the Government is committed to reducing the deficit below 3% by the end of 2015.

The fiscal adjustment proposed by the institute includes €200m raised through wealth taxes such as reforms to the capital acquisitions tax and pension reliefs; a further €100m through increasing PRSI contributions; reforms to the corporate tax system that will generate another €100m; while a revamped water charge system that is scaled for household income, with increased charges for businesses, is forecast to raise €500m.

A further €300m can be raised through carry-over savings from the Haddington Road Agreement, according to the institute. This would be offset by €200m capital spending in social housing combined with €200m in current spending on programmes for the disadvantaged. According to Dr McDonnell, Ireland has one of the lowest investment rates in the economy among EU countries. If this trend continues, then it will undermine key services over the longer term, which in turn will weigh on the economy’s competitiveness.

Consequently, the institute is proposing an ‘off-the-books’ public investment of €1bn, which will be financed through the Strategic Investment Fund. This would be earmarked for schools, education, broadband infrastructure and other projects.

The think tank advocates the retention of the property tax. Mr McDonnell argues that “it is a core component of an intelligently designed revenue base.”

However, houses that are suffering from negative equity or where there is low household income could be exempted. However, the State would have a lien (security interest) on the proceeds when the house is subsequently sold, or passed on for inheritance.

Overall, the institute forecasts economic growth of 2.1% this year and 2.9% next year. Much of the this will come from an increase in investment.

Unemployment is expected to fall to 11.5% at the end of this year; 10.7% by the end of 2015 and 9.9% by the end of 2016.

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