Tax cuts in budget would be big mistake, says economist

The Government was wrong to promise tax cuts in next October’s budget as the uncertain economic backdrop makes it unlikely it will be able to deliver, according to a leading economist.

Tax cuts in budget would be big mistake, says economist

“The Government should not be doing this at this time. There should be no tax cuts for middle- income earners because it potentially exposes the economy to another shock,” said Stephen Kinsella, economics lecturer at the University of Limerick.

And in possibly a further setback for the Government, the record low yield on the 10-year bond issued by the NTMA could undermine its attempts to negotiate a debt deal with EU authorities, he added.

The release of the 2013 national accounts show the economic recovery is struggling to gain momentum. GDP for last year unexpectedly shrank 0.3% compared with a Government forecast of 0.2% growth. It fell 2.3% over the last three months of 2013.

Much of the drop-off in GDP has been attributed to the “pharma cliff”, whereby blockbuster drugs in the pharmaceutical sector come off patent, which has huge knock- on effects for sales revenue.

On a more positive note, GNP, which is a gauge of the domestic economy, grew by 3.4%.

The Government needs GDP growth of 2% this year if it is to meet the target agreed with the troika of reducing the fiscal deficit below 3% by the end of 2015.

“At the moment, the most important figure is [consumer] spending in the economy and what the latest figures show is not good,” said Mr Kinsella.

“Given that there were 60,000 jobs created last year, you would have expected spending over Christmas to have increased. Instead, domestic demand was down by 0.6%. This combined with the latest fiscal data show that overall, things are not great.”

The exchequer returns for February show the tax take was 0.1% behind target.

The Government’s medium- term strategy is to increase the tax wedge from “anti-cyclical” taxes such as the property, water charges, and carbon taxes. The aim is to lower income tax in an effort to boost productivity. “This makes sense in the good times, but it is dangerous to try it now.”

The NTMA issued its first scheduled bond in four years yesterday, raising €1bn at a record low yield of 2.97%. Market sources attribute its success to international factors rather than a reflection of the economy.

“The view now in the ECB is that Ireland is fine. It is fixed. The Government is going to find it much harder to get a recap of legacy debts and that is a huge blow.”

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