One of the country’s leading economic think-tanks has called for increased taxes and less spending to form the basis of next year’s budget.
The Economic and Social Research Institute said a contractionary budget — where more money is taken out of the economy than is put in — is needed in October to address what it calls “early signs” of overheating in the domestic economy.
The ESRI also welcomed the Government’s plan to include in next week’s Summer Economic Statement two budget scenarios to deal with both an orderly Brexit and a no-deal outcome — calling it a “wise and prudent” strategy at this time.
The ESRI also said it would not be against the idea of a supplementary —or emergency add-on budget — depending on the outcome of Brexit, despite Finance Minister Paschal Donohoe ruling out such a move earlier this week.
Mr Donohoe has confirmed Budget 2020 will be delivered on October 8; three weeks before Britain is due to leave the EU.
ESRI research professor Kieran McQuinn said the timing of events makes things “very difficult” and said the Government will have to make “a judgment call” on the final Brexit outcome.
Mr McQuinn said he hopes to see more clarity on the final shape of Brexit over the next four months, but added that history has shown that such thinking can be overly optimistic.
Regarding taxes, the ESRI said increases should only be made in areas “which would not have a distortionary impact on the labour market” and earmarked the carbon tax as a prime example.
“Carbon taxes can help both to effectively reduce the level of carbon emissions in the economy, while also addressing issues of income inequality,” it said.
Both the ESRI’s call for a contractionary budget and its continued optimism surrounding the Irish economy are totally dependent on Britain leaving the EU with an orderly exit deal in place.
It sees GDP growing by 4% this year — slightly up on its previous forecast of 3.8% — and by 3.2% in 2020. Consumer spending should grow 2.5% this year and by 2.3% next year, it said.
Figures from Visa showed a modest reduction in overall spending during May. Measured across all payment types, spend was down 1.4% on a year-on-year basis. It followed a 1.2% annualised rise in April, but May is only the second month to date this year where a fall has been registered.
The ESRI’s next economic forecasts are due in late September, when it is likely to give more detail over how the economy might be affected by a no-deal Brexit. At this point, all it is saying is that such an outcome would have a severe economic impact on the Irish economy.
As it stands, the institute is pencilling in export growth of 4.2% this year and 4.3% next and sees investment in the economy growing by over 7% in both years.
With unemployment set to fall to 4.4% this year and 4.1% by the end of 2020, the ESRI said the economy is effectively operating at its full potential level.
It also questioned the effectiveness of land taxes as a means of helping the housing crisis and said “greater vigilance” is needed to ensure essential infrastructure projects are delivered on a cost-efficient basis.
The ESRI said Brexit has clearly already had “a materially negative impact” on the Irish economy and US-China trade frictions are hampering investment.