Sunday 25 September 2016

Public sector pay demands and health spending a worry - S&P

Published 04/06/2016 | 02:30

Economist John FitzGerald warned that the economy risks overheating, and that the Government needs to either implement a neutral budget this year, or actually increase taxes to cool it down Photo: Tom Burke
Economist John FitzGerald warned that the economy risks overheating, and that the Government needs to either implement a neutral budget this year, or actually increase taxes to cool it down Photo: Tom Burke

Public sector wage pressures and persistent health budget overruns are expected to sequeeze any capital spending available to future-proof the economy, thanks to tight EU spending rules, Standard & Poor's has warmed.

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And to keep Independent TDs sweet, the minority government may end up diverting other spare cash to projects with lower economic priority, the agency warned.

S&P said household finances are improving but the debt to disposable income ratio still stands at over 155pc - compared to under 100pc in 2004.

But it was more upbeat on public debt, saying it believed net debt-to-GDP would fall to below 80pc next year, 12 months earlier than expected.

S&P affirmed its A+ rating fore Ireland and predicted the economy would grow annually by 3pc over the period to 2019.

It comes as economist John FitzGerald warned that the economy risks overheating, and that the Government needs to either implement a neutral budget this year, or actually increase taxes to cool it down.

He said if the economy continues to grow at the current pace, it will be approaching full employment by the end of next year and the economy will be at capacity. If housing targets are met, the "economy will be fit to explode", he told a conference organised by the Institute of International and European Affairs (IIEA).

"Under those circumstances, the Irish economy will need substantial fiscal action taken by the Government to take money out of the economy," he said.

"In the next budget, the Government will need at the very least to have a neutral budget, but probably should begin to take money out of the economy.

"In other words, taxes should be raised and not cut in the next budget. And certainly, the 21018 budget, the Government will need to take a lot of money out of the economy."

S&P said growth will increasingly be driven by domestic demand, but also continue to be supported by strong net exports.

It said that while economic growth is boosting average incomes, wage levels have scope to continue to grow without hurting competitiveness, "indicating that there is still some slack in the Irish economy".

But it warned that the unemployment rate, while falling, remains high. The agency said the possible effect of a Brexit on Ireland would be negative in the short to medium term, though its magnitude would be mixed across sectors.

"In terms of direct trade relationships, the UK accounts for only around 12.4pc of Irish goods and 20pc of Irish service exports, well below the 50pc levels observed when both countries joined the European Community in 1973.

"However, the sectors that serve the UK market are, on average, more labour intensive and any negative shocks could damage the mending Irish labour market."

It said other negative effects could be include the weakening of the UK's financial service sector, with which Ireland's financial service sector is closely linked, and the potential ripple effect stemming from lower demand from the rest of the EU.

And it warned about the fragile nature of the surge in corporation tax receipts.

"We expect revenue intake to remain strong in 2016, on the back of stronger domestic demand and continued high corporate earnings.

"A possible slowdown in economic activity, especially by multi-national companies, in case of a Brexit or weaker global demand may depress the corporation tax intake and result in weaker fiscal outcomes."

Irish Independent

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