There is no need for the Government to do an austerity budget as the level of growth in the economy will reduce the fiscal deficit down to 2.5%, according to the employers’ group, Ibec.
Ibec is forecasting GDP growth to reach 6.1% on the back of a broad-based recovery in the economy, which includes a 1.5% increase in consumer spending, a 14.2% increase in investment and a 12.2% increase in exports this year.
Even though the Department of Finance and Central Bank both revised upwards their growth forecasts this year to 4.5%, Ibec has issued the most bullish assessment of the economy of any organisation.
Moreover, it has again called on the Government to introduce income tax cuts in the budget.
“Ireland is firmly on the way back and this gives the Government options on budget day. Recent tax hikes have pushed our marginal tax rate, at 52%, way out of line with our international competitors.
“While the Government needs to keep a steady hand on expenditure, it now has the capacity to cut employment taxes in order to put more people back to work,” said its chief economist, Fergal O’Brien.
The Government has agreed with the troika to reduce the fiscal deficit below 3% by the end of next year. Originally this was to be achieved through a €2bn consolidation based on a growth forecast of 1.8%.
The IMF, EU Commission and Irish Fiscal Advisory Council have over recent weeks called on the Government to follow through with the €2bn adjustment. Without doing €2bn in budget cuts, the fiscal deficit would hit 3.6% at the end of this year and 2.5% at the end of next year, said Ibec.
The Government has signalled that it would look at modest income tax cuts and that overall the budget would be neutral.
Ibec noted that the economy is 3.5% below its peak in volume terms and 7.5% in money terms. And even though investment is expected to increase by 14.2% this year, the investment-to-GDP ratio is still 6.1% below its long-term average of 22.2%.
Rising unemployment and an end to austerity budgets will increase household disposable income for the first time since 2008. Ibec expects consumer spending to increase by 1.5% this year and 2.9% next year.
The unemployment rate is expected to fall to 10.9% at the end of this year and 9.6% by the end of next year. Moreover, the quality of employment is improving with a much greater proportion of full-time jobs being created.
The economy is expected to grow by 4.5% this year and 3% to 4% over the medium term, although the main downside risk stems from the fragile eurozone economy.
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