ESRI: Budget must not contain tax cuts

There should be no tax cuts in October’s budget even though more than 50,000 jobs are set to be created this year and the domestic economy will grow at a rate not seen since the days of the Celtic Tiger, according to the ESRI.

“We are now approaching the end of austerity,” said the ESRI’s chief economist, John FitzGerald.

In its latest quarterly economic review of the economy, it forecasts GNP growth of 3.5% this year and 3.7% next year. It also predicts the unemployment rate will drop to 10% by the end of 2015 and the fiscal deficit will fall to 2.8% over the same timeframe. This means that Government is on track to meet the 3% fiscal deficit target by the end of 2015 as agreed with the troika.

“GNP, which provides the best standard of living of Irish residents, is estimated to have grown by 3.3% in 2013. This shows an economy that is growing quite vigorously,” said the ESRI.

However, Mr FitzGerald said the Government “should err on the side of caution” and stick to the planned €2bn consolidation in October’s budget. It is very important that it meets the 3% fiscal deficit target next year, he added.

“If it does go for tax cuts, then it will have to go for higher spending cuts,” said Mr FitzGerald.

If the growth rate pans out according to forecast, then the only consolidation needed next year would be the €500m in water charges, said the institute.

The ESRI also said the economy is “some way off a housing bubble”. The rate of house completions is estimated at 12,000 this year and 15,000 next year — the lowest level of new building in the past 40 years.

Mr FitzGerald said the cost of building a new house was now less than market prices. He blamed the lack of supply on not enough property developers.

However, if a solution could be found over the short-term and if there was a ramp up in construction activity to meet demand, it had the potential to almost triple the numbers employed in the building sector and greatly increase the tax take for the Government, said the institute.

In a separate study into savings patterns across the entire economy conducted by the ESRI, it found the 21-35 age cohort have not been active in the property market since the economic crash in 2008. They have either been living at home or renting — and since 2010 their focus has been on saving. This age group is now ready to start buying houses, which is adding to demand.

If the housing shortage is not rectified soon, then it will lead to a much higher cost of living through higher rents and higher house prices, which will act as a drag on economic growth, warned Mr FitzGerald.