Monday 20 February 2017

Budget 2016: Proposals will continue boom-bust cycle warns ESRI

Published 30/09/2015 | 02:30

Kieran McQuinn of the ESRI
Kieran McQuinn of the ESRI

The Government should hold back on tax relief and extra spending in the Budget to avoid overheating the economy for the second time in a decade, the Economic and Social Research Institute (ESRI) has warned.

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The additional €1.5bn of spending increases and lower taxes planned for Budget 2016 is not needed in an economy already growing at the fastest pace in Europe, according to the economics agency.

A looser Budget now will only continue the so-called 'pro-cyclical' policies that drove the last boom and subsequent bust, according to Kieran McQuinn, Associate Research Professor at the ESRI.

He said it is the "first chance in 10 years" to offer a neutral Budget.

The run-up to the crash was characterised by free-spending budgets that overheated the economy, and a period of post-crash austerity deepened an already sharp crash, he said.

However, he broadly welcomed the Government's Capital Plan, saying there is an infrastructure deficit, in part because spending was cut so deeply after the crash.

The ESRI has updated its economic growth forecast for the Irish economy to 6pc in 2015 and 4.5pc next year, measured in terms of gross domestic product (GDP).

Mr McQuinn thinks the unemployment rate will fall to 9pc this year and 8pc by the end of 2016.

The pace of growth is being driven by trends including increased personal consumption.

"This is important from a policy perspective, as it indicates there is no macroeconomic rationale to stimulate domestic economic activity," the ESRI said in its Quarterly Economic Commentary for Autumn.

Pro-cyclical budget policies mean cutting spending when the economy is weak, and boosting it when things are going well.

That is seen as dangerous by economists because it exacerbates rather than tempers underlying trends - in other words, booms get boomier and busts are deepened.

According to Mr McQuinn, the October Budget is a rare opportunity to break that cycle, but only if Finance Minister Michael Noonan reverses his current course and adopts a flat or neutral Budget.

Softened

The ESRI said that Ireland was not in a position to fund a stimulus programme after the crash, but European action could have softened the impact of the recession.

"Europe could have done more to offset that, and we might not have seen unemployment at 14pc," Mr McQuinn said.

The spending increases planned for next year are not big enough to derail the economy in the near term, but he argued that the "chaos" of the crash demonstrated the need to break our pro-cyclical budgetary culture in favour of a model of sustainable growth.

On housing, the ESRI said the high cost of property could pose a long-term danger to the economy, but warned against using tax cuts to boost the construction sector.

Meanwhile, consultancy firm Deloitte called for measures to encourage indigenous companies. It wants capital gains tax to be tapered as a means to encourage entrepreneurs to become long-term owners, rather than sell businesses.

Irish Independent

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