There is “no rationale” for tax cuts in the forthcoming budget, the Economic and Social Research Institute (ESRI) has warned the Government. In its latest quarterly bulletin the think tank said the Irish economy was now running up against capacity constraints “particularly in the labour and housing markets”, giving rise to a risk of overheating.
The comments come as the ESRI slashed its growth forecast for the economy on the back of a significant slowdown in exports by the multinational-dominated pharma sector. It now expects the economy to grow by just 0.1 per cent in gross domestic product (GDP) terms this year, down from a previous forecast of 5.5 per cent.
“We don’t really at this point see any clear rationale to reduce the overall tax burden in the economy,” the ESRI’s Kieran McQuinn said, noting consumer spending was still growing “quite strongly” despite the inflationary squeeze, while savings levels remained high.
“You have to be careful when you are putting a lot of money into the economy in terms of investment. Given the strong performance of the economy there is a danger that you will overheat it. You’ve got to be careful where the funds go,” he said.
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The Cabinet is said to be divided on the possibility of tax cuts in the budget, with Taoiseach Leo Varadkar championing the idea of a €1,000 tax break for middle-income earners. Finance Ministers Michael McGrath and Paschal Donohoe are said to favour a more cautious approach, adhering to the Government’s recently adopted 5 per cent spending rule that would limit the Coalition’s tax package.
In its latest assessment the ESRI said the domestic economy – as measured by modified domestic demand – was continuing to grow robustly. It expects modified domestic demand to expand by 3.5 per cent this year and 4 per cent in 2024, with “the greater pace of economic activity mainly attributable to the expected lower rate of inflation”.
However, it said that “economic headwinds, such as rising interest rates, slower than expected global trade and persistent inflation, are clouding the international outlook”.
While it expects headline inflation in the Irish economy to fall to 5 per cent this year and to 3 per cent next year, the ESRI warned that if the current rise in wage growth passed “through to wage-based price increases, a higher-for-longer interest rate cycle will likely be needed to address inflation”.
European Central Bank policymakers are increasingly concerned that overly tight labour markets across Europe are putting upward pressure on prices, giving rise to stickier-than-expected inflation.
The ESRI forecast the Government would have a budget surplus of nearly €10 billion this year and over €15 billion next year on the back of buoyant corporation tax receipts.
