The economy is expanding so strongly that Finance Minister Paschal Donohoe ought to turn his back on deep cuts to personal taxes and spend even less than what will be available to him in so-called fiscal space, the Economic and Social Research Institute has said.
The economy is not expanding at the level suggested by the official headline figures but the underlying growth rate of up to 5% is powerful enough for the Government to forego pumping more money through net tax cuts, it said.
The Government has also to be prudent over boosting day-to-day spending and maybe should hold back in spending “the fiscal space available to it” if it wants to sustain the large amounts it has earmarked for infrastructure investments, ESRI professor Kieran McQuinn told reporters, as the think-tank unveiled its latest quarterly outlook on the economy.
Mr McQuinn said the Government could yet work to remove “anomalies” in the personal tax code, such as the relatively low levels of incomes at which people start paying the highest marginal rate of income tax, but that the next budget should be framed in the context of presenting an overall neutral package in personal taxes by offsetting any stimulus by raising other personal taxes.
The freezing of the local property tax was not desirable, he said.
In its first economic outlook that covers 2019 when the UK may likely have negotiated its exit from the EU, the think-tank projects the Irish economy, after posting 4.8% growth this year, will expand a further 3.9% next year. Unemployment will fall, to an average annual rate of 4.5% in 2019, which although not yet matching the best of the boom years was still nearing a level where wage pressures could build, the ESRI said.
Calling for more work to be done, the think-tank again raises issues about the distortions caused by multinationals that mean the headline GDP measures overstate ‘real’ or underlying growth and distort the picture for investment and import in the domestic economy.
It went further by saying that the new gross national income measure will likely fall short too, and calls for an alternative set of national accounts.
Based on ESB connections, housing builds will reach 24,000 this year and rise to 29,500 in 2019, but will still fall far short of the units required to meet pent-up demand, it believes.
Mr McQuinn said house prices would likely continue to grow strongly in the next four years. The “litmus test” for resolving the housing crisis would be if house prices were rising close to the annual level of consumer prices of around 1.5% and not by 9%, he said.