DKM questions the need for giveaway budget

DKM Economic Consultants has joined the likes of the Economic and Social Research Institute (ESRI) in questioning the need for the Government to pump significant sums into the economy in next week’s budget.

In its latest ‘economy watch’, DKM said yesterday that private consumption is likely to contribute positively to Ireland’s economic growth during 2016, following an expansion of over 3% this year. Consensus forecasts are for private consumption to grow 2.7% in 2016.

“As market conditions improve and the recovery takes hold, one may question the need for additional fiscal expansion in the upcoming budget,” said DKM chairman Brendan Dowling.

“This will be an election budget, so expect some eye-catching give-aways. Unfortunately, the scope for tax cuts will probably be frittered away in marginal changes rather than be used to implement a more comprehensive tax reform.

“Reforming PRSI and the Universal Social Charge into a comprehensive system for funding future pension cuts and current and future health and welfare costs will only be possible in the context of significant tax concessions to offset the losers from such reforms.

“However, it is likely that the electoral focus of the budget will trump economic reform.”

DKM’s comments follow recent commentary from economic think-tank the ESRI that warned expansionary budgets could inflate the economy.

In its latest economic forecast report, published at the end of September, the ESRI called on the Government to reverse its plan for €1.5bn of spending increases and tax cuts. The report’s co-author, Kieran McQuinn, said: “the increase in the pace of economic growth reinforces the case for a netural budget this year.

“There has been some suggestion that a reduction in personal taxation rates is needed to consolidate the recovery. However, the recent increase in personal expenditure undermines this notion. A reduction in personal taxation is not required for growth in household consumption.

“Similarly, the better-than-expected growth outlook, along with the relatively buoyant tax receipts, may be regarded as a justification for a generous budget. There again, the strength of the Irish recovery actually indicates the most prudent budgetary course of action, at this time, is to follow a neutral fiscal strategy.”

DKM suggests that the weakening euro should produce positive side-effects for Irish exports, which are forecast to grow by 10% this year .

“Unemployment is expected to fall to 9.5% in 2015 and 8.3% in 2016, which is likely to give a stimulus to consumer sentiment despite a slight dip in September to 100.6,” DKM said.