Central Bank bullish on growth, but warns over taxes and housing

Latest outlook sees the economy growing in GDP terms by 8.3% this year, 5.4% next year and 4.8% in 2023.

The Central Bank expects the economy to surge this year and unemployment to fall, but it has again suggested that tax increases may be needed to cover a continued rise in Government spending.

It also expects it to be “many years” before housing supply meets rising demand, with the housing crisis likely to continue to be a drag on the economy.

In its latest quarterly outlook, the Central Bank said it sees the economy growing in GDP terms by 8.3% this year, 5.4% next year and 4.8% in 2023. Its 2021 outlook is up from a previous forecast of 5.9% growth and tallies with similarly robust growth forecasts from the ESRI and Ibec.

The Central Bank also sees strong export growth of 9% this year and around 5% in each of the next two years. It said unemployment should fall to around 7% by the end of 2021 and reach around 6.6% by 2023. That would still be above pre-pandemic levels, but was mainly due to a growing workforce.

“A strong rebound of the Irish economy is emerging. With an increasingly successful deployment of vaccines and bolstered by continued support from monetary and fiscal policy, there is a widespread improvement of consumer and business sentiment,” the Central Bank’s director of economics and statistics Mark Cassidy said.

“While the possibility of a more protracted recovery in certain sectors cannot be discounted, the prospects for the economy as a whole appear to be more favourable and risks to the growth outlook appear to be relatively balanced,” he said.

Mr Cassidy said further delays to reopening certain parts of the economy, such as indoor hospitality, should only delay growth rather than have any material impact on the economy, once the continued closure is not for a long duration.

However, the Central Bank warned “a credible path” towards a lower public debt ratio is needed against a backdrop of corporate tax uncertainty and an ageing population.

“With potentially strong demand on Government resources, it is reasonable to consider the need for additional revenue-raising measures or reducing other areas of spending,” it said.

Increased tax rates, reduced tax breaks and an expanded tax base are the usual means of bolstering government revenues.

It has previously warned against permanent increases in Government spending being solely funded by debt borrowing.

Mr Cassidy said some kind of “trade off” between revenue-raising methods and reduced spending will be needed in all upcoming annual budgets, but he said that natural economic growth could cover some of the cost.

Mr Cassidy also said it was likely to be “many years” before housing output begins to meet demand levels. He said by the end of 2023 annual house completions were likely to be around 26,000; well short of the current demand for 35,000 a year.

He said probably around 25,000 fewer houses than expected would be built between 2020 and 2023 due to the crisis. While he said slow housing recovery would have an impact on the economy, the main effect would continue to be felt by potential homeowners.