Sunday 28 December 2014

End of austerity: we’ll escape €1.5bn in cutbacks

ESRI predicts growth, water tax enough to spare us painful budget

Published 11/04/2014 | 02:30

The ESRI predicted there may be no need for a final austerity budget this year.. Picture posed: Thinkstock
The ESRI predicted there may be no need for a final austerity budget this year.. Picture posed: Thinkstock

The country will be spared most of the €2bn in planned cutbacks if economic growth continues at current levels.

In one of the most optimistic assessments since the economic crisis began in 2008, the ESRI predicted there may be no need for a final austerity budget this year.

It forecasts the economy is set to grow by a “vigorous” 2.6pc this year and 3.5pc in 2015, a level which would make swingeing cuts unnecessary.

Budget 2015 will be the first budget in six years where the Government will have significant |leeway to stall the cutbacks, although it will press ahead with the introduction of water charges.

The Finance Minister Michael Noonan is due to unleash another raft of cutbacks as part of the five-year recovery plan in October.

However, the Government wants to cut taxes in next year's budget and the positive economic outlook will make it more likely that the Coalition will follow through with its promises.

The ESRI is still factoring in the €500m to come from water charges next year, meaning it sees the remaining €1.5bn planned in cuts and taxes in the next Budget as no longer required.

However, Mr Noonan’s officials are playing down the prospects of changing the budget predictions at this stage. The Government's target of cutting annual borrowing to 3pc of economic output by the end of next year, as agreed under the bailout, will remain unchanged.

However, the Department of Finance is due to make its own revised forecasts later this month.

The Stability Programme Update will set out the position six months out from Budget 2015.

But October's Budget will be still based on the most up-to-date economic and fiscal data at that time, as endorsed by the Fiscal Advisory Council.

However, the Economic and Social Research Institute (ESRI) believes that we are approaching “the end of the very painful period” of economic hardship and 50,000 new jobs will be created this year.

It warns that rent and house prices are likely to continue to rise amid tight supply, but said another bubble in the property market was a long way off.

The independent think-tank said the economy was recovering “quite vigorously” and said the state's finances are returning to health more rapidly than expected.

“It is possible… that the Budget will involve much less austerity than had previously been anticipated,” ESRI economist Professor John FitzGerald said.

“We’re reaching the end of the road on austerity, we can’t be certain whether it’s totally ended. But if the forecasts are right, then we are reaching the end of it.”

But it warned risks remained and said no decision on the Budget could be taken until September given the potential for “unpleasant surprises”.

The Government’s recovery plan includes raising around €2bn in Budget 2015 through a combination of tax hikes and spending cuts.

The ESRI said the €500m expected to be collected from controversial water charges next year, as well as the ongoing savings from the Haddington Road agreement, could be the only measures needed.

The forecast comes on the back of strong employment figures and the fact that consumer demand is expected to recover this year.

In its latest analysis of the economy, the ESRI said employment levels would return to what was seen in early 2008 by next year, with about two million people in work and the jobless rate dropping to about 10pc.

But the ERSI sounded a note of caution that risks and the potential for “unpleasant surprises” remained, and said it was too early to make a firm pronouncement on the Budget until after the summer.

The think-tank warned that inflation remained too low, rising to just 0.2pc last month, and said deflation – a period of falling prices – was yet possible.

For credibility to be maintained internationally, the Government must remain locked into its plan to push the gap between how much the state spends and takes in through taxes and other revenue to below 3pc of the value of the economy next year, the ESRI said.

The think-tank forecast GDP growth of 2.6pc this year – stronger than the estimates from the Department of Finance and Central Bank – buoyed by a significant rise in investment and a jump in domestic demand.

Mr FitzGerald said talk of a housing bubble was a long way off, as the number of house completions this year is estimated at about 12,000. About 25,000 houses per year are needed, he has said.

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