Tax cuts put economy at risk, warn experts

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According to the main think tank of the country, there’s no need for tax cuts or rises in spending, as there’s a threat of the economic breakdown.

The Economic and Social Research Institute (ESRI) has reported that Ireland can be considered free from the 2008 crisis, as its recovery is completed.

The main piece of advice for the government was to follow a neutral strategy. Is means that nothing has to be done to the economy of the country, which includes no tax cuts and no increases in spending.

 

The concerns started after the message from the finance minister Michael Noonan that the Irish government had a plan to implement some tax cuts and increase spending by €1 billion.

Mr Noonan stood for the idea to cancel the universal social charge (USC), yet he admitted that there was no recommendation from the Department of Finance to implement the plan. He said that the process of abolishing the tax would begin with the budget and last five years.

Responding to questions from Pearse Doherty, Mr Noonan said that he was “not aware” of any organisation that endorsed the full abolition of the USC but that it was up to ministers to make political decisions.

“The USC on top of income tax gives us marginal rates of tax which are too high and I intend reducing them,” he said in a testy exchange. “There’s plenty of evidence to say that this is valid economic approach and a valid fiscal approach. I know your opinion on the USC. It is a matter of opinion, not a matter of evidence and I have a different opinion. Until [Sinn Fein] have a majority, my opinion will carry more weight than your opinion.”

Mr Doherty said that the object of the committee was to test and challenge the government’s budgetary proposals.

The ESRI said that the inflated 2015 GDP growth figure of 26.3 per cent could potentially have very damaging consequences because the government would have to introduce massive tax hikes and spending cuts to comply with EU fiscal rules.

According to the EU, a member state is supposed to take counter-cyclical measures such as tax increases and spending cuts if an economy shows signs of overheating.

Kieran McQuinn, one of the authors of the ESRI review, said that the highly misleading figure meant that it was essential to produce an alternative set of national accounts that more accurately reflected economy activity.

“Clearly no one believes that the Irish economy grew by 26 per cent in real terms in 2015 or indeed by almost 9 per cent in 2014, however . . . it is imperative that these set of results be accompanied by national accounts, which in so far as is possible, give an accurate assessment of real activity in the Irish economy.”

Dr McQuinn called on the Central Statistics Office to release the 2015 GDP figure using an older methodology known as ESA 95. It is understood that the activities of one multinational, which has its European headquarters in Ireland and uses contract manufacturing in China extensively, played a significant part in distorting the 2015 figure. Under ESA 95 accounting guidelines, these contract manufacturing activities would not have shown up in the Irish national accounts.

Dr McQuinn said that the revised 2015 Irish GDP figure had wider implications. “For example, Eurostat reports an increase of 2.1 per cent for the euro area in 2015. By aggregating up the individual growth rates across the euro area, it can be calculated that the Irish growth rate of 26 per cent contributed 0.5 per cent of this 2.1 per cent figure.

“Had the Irish economy grown at 5.6 per cent in 2015 — as per our adjusted estimate — then the euro area growth rate would be 1.6 per cent. This is significant as a growth rate in excess of 2 per cent may indicate that the European economy is growing at its potential rate, which, in turn, could have certain monetary policy implications.”

The ESRI has marginally downgraded its growth forecast to 4.3 per cent this year and 3.8 per cent next year because of concerns over the effects of Brexit and a slowdown in the Chinese economy.

Mr Noonan gave a number of broad hints about the budget, saying that proposals on childcare would not be tax-based because introducing tax credits would lead to increased charges for families.

He confirmed that he had no plans to equalise the price of petrol and diesel. He added that he was seeking to raise the point at which people paid tax when they inherited a house and said that there would be an incentive scheme for first-time buyers.

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