ESRI warns Government to avoid taking measures that could overheat the economy

Government urged to put more cash into the National Reserve Fund in 2024 rather than succumb to the temptation of spending more in what could be an election year 

ESRI research professor Kieran McQuinn said there is a case for increasing the sum going into the National Reserve Fund if tax receipts are as large as envisaged. File picture: Mark Stedman

The Government should consider putting even more money than it currently plans into the National Reserve Fund in 2024 in order to avoid the temptation of taking measures that could overheat the economy in a possible election year, the Economic and Social Research Institute has said.

It comes as the ESRI forecasts that the budget surplus is set to balloon to €15.5bn in 2024, from €9.8bn this year, reflecting the huge value of tax receipts continuing to flow into the exchequer.

Kieran McQuinn, an economics professor at the ESRI, said: 

If the receipts are as big as envisaged then there is a case for possibly even increasing the receipts going into the National Reserve Fund as a way of ensuring that policy does not contribute to overheating. 

The ESRI said it supports the Government putting aside windfall or excess tax revenues to address the State’s long-term pension liabilities, which may also involve the setting up of a sovereign wealth fund.

It also potentially backs using some of the funds to address “bottlenecks” in housing and healthcare.

“From an economic perspective, the challenge is not to fuel overheating because clearly, the economy is running very hot at the moment”, Mr McQuinn said.

The ESRI report predicts the remarkable growth of the Irish economy is set to continue, despite the pandemic and the cost-of-living crises.

However, they warn that, for the first time in years, valuable exports from the multinational pharma giants are faltering.

Many of the world’s largest pharma companies, including Pfizer, have major facilities here and have made outsized contributions to Ireland’s corporation tax revenues.

Conor O’Toole, associate research professor at the ESRI, said the economy had weathered the inflation shocks from war in Ukraine and from the damage to global supply chains.

“In a sense, it really is a tale of two economies again, with the domestic economic performing robustly,” Mr O’Toole said, citing near-record low levels of unemployment, a recovery in construction, and “very healthy” public finances.

“Meanwhile, counter to what we had expected, there is weakness in export growth due to a slowdown in pharma companies,” he said.

The ESRI anticipates some sort of fall in household utility bills in the coming months should the drop in wholesale gas and electricity prices be passed on.

On housing, it said the fallout from the pandemic and surging building material costs will peg the output of new houses to 27,000 homes this year and that, helped by easing inflation, 30,000 homes will be built in 2024.

The growth in house prices had slowed significantly this year and in real terms had fallen after taking inflation into account.