The Government should avoid pumping too much into the economy in October’s budget because the underlying economy is much more fragile than many people think, said economist Jim Power.
In his annual economic review for Friends First, Mr Power said, in a bout of “electioneering”, Finance Minister Paschal Donohoe could be tempted to embrace “populist measures” for an economy that doesn’t need more fiscal stimulus.
The Government should instead recognise that real debt levels are significantly high, at 111%, and the bulk of the budget day package of €3.4 billion was already spoken for.
Mr Power said Irish-owned firms are losing out in relation to multinationals, and in turn, Government has become dangerously dependent on the corporate tax revenues generated by foreign-owned firms.
“We cannot ignore the fact that the top 10% of firms in Ireland account for 87% of value-added in manufacturing and 94% in services; a third of total exports are accounted for by just five firms and 39% of corporation tax is paid for by the top 10 companies.
“Any shock to these firms or sectors would reverberate throughout our economy and undermine the positive growth achieved. In this context, it is essential that policymakers do as much as possible to support the rest of the economy, particularly the indigenous companies that make such a high value-added contribution to the Irish economy,” he said.
Citing an “unacceptable” growth in house prices, he said Ireland is facing “a crisis of competitiveness”.
The Government should instead nurture business competitiveness. Nonetheless, the wider economy is showing few signs of overheating, with credit growth and consumer prices in general stable.
Consumers have resisted price increases — “the retail market is struggling to achieve value growth”, he said, and the number of jobs in the retail industry has fallen. Wage pressures will inevitably grow and labour become in short supply, applying a brake to “potential growth”.
He projects GDP will rise 5.5% this year and easily grow again, by 4.5%, in 2019. On Brexit, the economist sees the talks unfolding “in a very unfavourable, if not alarming manner and sterling is under considerable pressure”.
With the UK likely to grow at the slowest pace in Europe, “budgetary policy should be guided by these realities and not by the temptation to pander to populist pressures,” he said.
“Given Ireland’s reliance on this key export market, the risks posed by a hard Brexit are evidenced by the drop of 7.2% in exports to the UK already this year,” the economist said.