ESRI: No rationale for any tax cuts in budget

A leading economic think-tank has said next month’s budget should contain no tax cuts and only focus on expenditure measures that can “improve the potential growth of the economy”.

While only around €300m of the proposed €1bn budgetary package is expected to cover tax cuts, the Economic and Social Research Institute (ESRI) has called for a “neutral” budget, or one that neither contracts nor stimulates the economy.

It said there is “no great rationale” for tax cuts and that it is important to maintain income tax as a significant portion of tax revenues, adding that the economy does not need to be further stimulated.

“The case for a neutral policy is compounded by the particularly strong increases in personal consumption in 2015,” the ESRI outlines in its autumn economic commentary.

“This, along with the continuing increases in retail sales observed in 2016, suggests that economic activity does not need to be further stimulated by reducing personal taxation levels.”

“With consumption and investment set to be the main sources of growth in 2016 and 2017, this has important implications for budgetary policy,” said ESRI economist David Duffy.

“In particular, the significant pace of economic growth experienced by the Irish economy over the past number of years argues for a neutral fiscal stance in the forthcoming budget.”

While domestic demand, rather than external factors, are now underpinning Irish growth, the ESRI said that it views it as a positive that is down to a slowdown in global growth, Brexit uncertainties, and exchange rate weaknesses, rather than because of Ireland’s national competitiveness being damaged.

It added that it expects to see external demand pick-up once the dust has settled on the Brexit issue in the next couple of years. That said, though, it sees sterling remaining weak against the euro for the foreseeable future.

The ESRI still sees Ireland’s economic growth remaining strong over the coming two years and continuing to outperform many of its European peers.

However, it has also lowered its expectations for that growth. The ESRI now sees Irish GDP growing by 4.3% this year and by 3.8% next year. Those numbers are down from the respective 4.6% and 4.7% forecasts the Institute made just three months ago.

While most commentators have lowered their forecasts, the ESRI remains one of the more bullish (along with the Central Bank) — with Ibec, last week, dropping its 2016 GDP forecast by almost 1% to 3.9% and Merrion Stockbrokers expected to significantly reduce its existing 4.8% forecast in the coming weeks.

The ESRI also sees Irish export growth slowing to 8.3% this year and further to 7.6% next year.

Personal consumption levels should rise by around 4% this year and next and the unemployment rate should fall to an average of 8.3% by the end of 2016 and hit 7.3% by the end of 2017.

Earlier this year, the institute was forecasting unemployment rates of 7.6% and 6.5% for this year and next.

The think-tank also warned that recent pressure will remain on house prices and rent levels until housing supply levels can meet demand.

While agreeing with the need for mortgage lending caps, it said they should be reviewed to mirror changes in the housing market on a periodic basis.

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