There should be no tax cuts in Budget 2017, says the ESRI

THE TIME FOR tax breaks in order to stimulate the economy is over, according to one of Ireland’s most prominent think tanks.

According to new quarterly research published by the ESRI the economy will continue to grow by roughly 4% in both 2016 and 2017 and unemployment will drop to nearly 7% by the end of next year.

Speaking at a media briefing yesterday, Kieran McQuinn, author of the ESRI report, said that the Irish economy is back to its previous potential and that the upcoming budget should be “broadly speaking, neutral”. He said that this should be subject to indexation of taxes, a move that would see the rate of taxation attached to inflation,

“Given how strong the economy is performing, and even when you strip out the 26% GDP increase, we still think the economy improved in 2015 by 5.5% and we still think it could grow by over 4% in the present year and by 4% next year,” he said.

“That suggests the economy doesn’t need to be further stimulated in terms of tax cuts. We think that assessment is reinforced by the fact domestic consumption grew very strongly last year.”

Further research by the ESRI suggested that the purchase of goods and services by Irish consumers is not growing as strongly as last year. However, McQuinn noted there is still a lot of activity in retail.

David Duffy (left) and Kieran McQuinn of the ESRI

Income tax

McQuinn added that there is no obvious rationale to cut taxes and we need to learn from previous mistakes that reduced the spending power of the country during the recession.

“As far as fiscal stability is concerned, it is important to maintain income tax as a sizable source of government revenue,” he said.

“We obviously need to heed the lessons of last 10 to 11 years when there was a sizable narrowing of the income tax base.

“Revenue seem to suggest that the increase in corporation tax is somewhat sustainable, (but) there is a degree of uncertainty of this increase. Therefore, that reinforces the notion we need to maintain income tax and at the same level of contribution to the government that it currently does.”

The group suggested that the only increases in expenditure that the government should consider are those that help improve the productive capacity of the economy and improve competitiveness.

“We have advocated strong increases in expenditure in social housing,” said McQuinn. “We believe that is in line with that notion. We also believe that the pressures in the housing market is beginning to have an impact as far as competitiveness is concerned.”

Leprechaun economics

Earlier this year, it was reported that Ireland’s GDP grew by 26% in 2015, which was significantly ahead of forecasts for the year. The official stats released were called ‘Leprechaun economics’ by Nobel laureate economist Paul Krugman.

Paul Krugman

Speaking at the briefing, David Duffy, another author of the quarterly report, said these inflated GDP scores could harm the reputation of the Irish economy and that there needs to be economic measurements that accurately measure what’s is happening in the domestic economy.

The massive GDP figure registered by Ireland was partly due to the activities of multinationals in the country and Duffy said if this activity was to shift for some reason, Ireland could lose 10% to 15% of its GDP and appear to be in recession.

He said the CSO compiles the national accounts according to the new ESA 2010 standards, but also by the old ESA 1995 method and publishing this old standard could give a better overview of the real state of the Irish economy.

“ESA 1995 tends to place more of an emphasis on the physical activity of the good or service. Essentially it has to come into the Irish jurisdiction to show up in the national accounts,” he said.

“In the updated ESA 2010, it is more about the residence of the company, so we think that would be a possible avenue to go down in the short term.”