The Irish economy is in a “sweet spot”, with tax receipts on track to overshoot initial Government targets by €2 billion, according to stockbroking firm Goodbody.
The Government should spend this tax surplus by making "targeted giveaways" through capital investment, income tax cuts and tax breaks that support entrepreneurship and housebuilding activity, Goodbody economists Dermot O'Leary and Juliet Tennent write in the firm's latest quarterly "health check".
The budget deficit will fall to 1.9 per cent this year, Goodbody says, which would represent an improvement on October’s budget day forecast of 2.7 per cent. The deficit will then decline to just 0.9 per cent next year, it forecasts, pointing to “leeway for looser fiscal policy” over the period, they suggest.
“Given the expected combination of growth, lower interest costs, a primary surplus and the sale of bank stakes, Ireland’s debt sustainability will continue to improve over the coming years,” said Mr O’Leary.
“Fiscal constraints remain, however, so the Irish Government must make use of the relatively scarce resources available to it.”
Goodbody has made slight upgrades to its forecasts for Ireland’s gross domestic product (GDP), which it now predicts will be 4.3 per cent for this year and 4 per cent in 2016. This would likely make Ireland the fastest-growing economy in the euro zone in the next two years, a repeat of the performance last year when Irish GDP grew by 4.8 per cent in 2014.
While Goodbody’s forecasts for the next two years are lower than the 2014 out-turn, the quality of the recovery is improving, it said, with domestic demand “clearly gaining momentum”.
The recovery has “very much been investment-led to date” but stronger rates of domestic demand is set to become “the key driver”, with growth of 4.4 per cent and 5.1 per cent now anticipated in 2015 and 2016 respectively.
Consumers are now “in a position to support the recovery”, and consumer spending will be buoyed by factors including a “healthy pace” in employment growth, private sector pay increases, falls in income taxes and record-low interest rates.
Exports, which were already expanding, will be boosted by weakness in the euro, Goodbody notes, with sectors that export to the UK market, such as agri-food, likely to be among the main beneficiaries.
The upbeat Goodbody report follows exchequer returns data published at the beginning of April which showed that tax receipts in the first three months of the year came in 5.5 per cent – or some €545 million – ahead of the Government’s budget day forecasts.
“Irish policymakers have done a good job of managing the bust,” the Goodbody report concludes. “It is equally important to manage the boom in a way that secures growth into the medium-term.”
