ESRI urges ‘cautious’ strategy for Budget 2018

The Economic and Social Research Institute (ESRI) has left its forecasts for Irish economic growth unchanged – at 3.8% for this year and 3.6% for 2018 – but has urged new Finance Minister Paschal Donohoe to adopt a more “cautious” stance than previously envisaged in October’s budget.

In its latest quarterly economic commentary, the think-tank said tax receipt trends this year suggest a slightly higher budget deficit in 2017 than originally forecast. It added that the unknown effects of Brexit also call for a more careful budgetary approach for next year.

“The reduction in taxation receipts from revised forecasts now suggests that the general government balance will be larger than had been expected at the start of the year. We now believe there will be a deficit in 2017 of -0.5% of GDP, compared with -0.1% in [our] previous commentary. This suggests that the budgetary strategy for 2018 needs to be more cautious than had been originally intended,” the Institute said.

Regarding Brexit, the ESRI said the issue of Britain leaving the EU continues to pose “a substantial risk” to the Irish economy. It added that a ‘hard’ outcome – where the UK gives up access to the European Single Market and Customs Union – would, over the first three years of such a policy, reduce potential output growth in the Irish economy by around 2.5%.

“Over the same period, this would reduce the amount of fiscal space in the Irish economy by approximately €600m,” according to the Institute, which said that would consequently reduce the extent to which Irish Government expenditure can be increased over the medium-term.

The report’s co-authors Kieran McQuinn and Conor O’Toole said 2017, to date, has seen certain “countervailing trends” emerge relating to the overall positive performance of the Irish economy.

“On the positive side, labour market data illustrates that the pace of employment creation, and subsequent reduction in unemployment, increased in 2017. Less encouragingly, the state of the public finances and the performance of different taxation headings, in particular, have been significantly less robust in the present year.

“Apart from Vat receipts, most other tax headings either display weak growth or declines with respect to the same time last year,” they said.

As well as its calls on GDP growth, the ESRI said GNP – which excludes financial contribution from multinational companies – should grow by 3.5% this year, followed by similar growth of 3.3% in 2018.

The country’s unemployment rate, meanwhile, should finish 2017 at around 6.1% - down from 7.9% at the end of 2016 – and close out 2018 at an even healthier rate of 5.4%.

In its latest commentary, the ESRI also questions official house building figures and suggests they are overstating the actual present rate of construction activity.

It said many of the units being reported as new build projects could be completions of partial builds begun before the onset of the financial crash in 2007/2008.

While it doesn’t foresee another housing credit bubble forming, the Institute expects rents and prices to remain elevated.

While there is “no imminent credit risk”, the ESRI said “prudent and ongoing” monitoring of credit levels is required.


Don’t just bung this festive favourite in a boring pot and wait for it to wilt, says Hannah Stephenson.How to style your Christmas poinsettia

More From The Irish Examiner