The Government has little room for significant tax cuts despite the European Commission projecting the economy here will grow at a healthy rate through 2018, according to analysts.
In its assessment of the Irish economy, headlined, ‘Robust growth in uncertain times’, the commission forecast GDP will grow by 3.4% this year and by 3.3% next year, despite unprecedented risks facing the economy.
The forecasts were part of its winter forecasts in which the commission said all EU economies would grow, while it separately increased its 2017 growth projection for the UK economy.
The commission’s Irish forecasts, however, highlight the risks of Brexit and the potential for US president Donald Trump’s tax cuts and his ‘America first’ trade policies to weaken the flow of investments into Ireland.
It said a certain amount of damage has already been inflicted on Irish agri-food exporters into Britain, who are most exposed to the slump in the value of sterling against the euro.
Adverse outcomes from Brexit and Trump policies could spread to hit consumer spending, while “the future evolution of the activities of multinationals remains uncertain and could impact GDP growth in both directions”, the commission said, as it outlined the main risks facing the economy.
For the time being, domestic demand and exports are expected to continue growing, but the risks mean “uncertainty weighs on the improvement” in the Government’s finances.
Austin Hughes, chief economist at KBC Bank Ireland, said its own survey of Irish businesses, which was also published yesterday, chimed with the EU’s concerns.
Despite the “benign” outlook for growth, public sector pay demands, which were not the subject of comment by the commission in its report, would probably reduce the room for spending rises and tax cuts, said Mr Hughes.
The KBC and Chartered Accountants Ireland survey of firms found that the slump in the value of sterling had affected many firms. Company chiefs also worried about the implications of the Trump administration.
Nonetheless, “Irish business sentiment has started 2017 on a positive note as companies’ activity levels proved to be a little stronger than had been feared in late 2016 and expectations for output volumes in coming months remain promising”, the survey found.
The survey of 371 respondents found many firms plan to pay staff more this year, with pay increases of 2% to 5%, but are reducing the number of new hirings.
Owen Callan, analyst at Investec Ireland, said the EU assessment showed Irish economic prospects continue to be under scrutiny, due to Brexit and President Trump. Such uncertainties could affect consumer spending, dissuade companies from investing, and damage the amount of money the Government has at hand for tax cuts and spending increases.
Growth of 3.3% in 2018 would deliver the room for tax cuts, but the other pressures on the Government from public sector pay and political pressures mean that risks have increased, said Mr Callan.
Separately, economics commissioner Pierre Moscovici yesterday warned leaving the euro would be suicide for France, as polls showed far-right candidate Marine Le Pen, who advocates a referendum on the matter, gaining support ahead of the presidential elections.
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