Business Irish

Friday 24 February 2017

Tax cuts will overheat the economy says OECD

Michael Cogley and Sean Duffy

Irish manufacturing industry. Photo: PA
Irish manufacturing industry. Photo: PA

Government policies need to change to make the economic recovery more "inclusive" but spending also has to be controlled to mitigate the risk of a new downturn, according to a new report in the Irish economy.

Cutting taxes risks overheating the economy, it said.

The Organisation for Economic Cooperation and Development (OECD) released its global economic outlook yesterday, forecasting economic growth in Ireland to remain strong for the remainder of this year and into 2017 - with the significant caveat that the economy will be at major risk should the UK vote for Brexit later this month.

Even before votes are cast, uncertainty about the outcome is seen as a key contributor to the slowdown in manufacturing in Ireland and in Britain revealed in separate figures published yesterday.

Growth in the Irish manufacturing industry slowed to a near three-year low in May. The latest Investec Manufacturing Purchasing Managers' Index (PMI) shows headline growth here at 51.5 in May, the worst since July 2013.

The index measures growth on a scale either side of 50 - where a score above 50 is positive.

May marked the end of a 34-month run of expansion for new export orders, and jobs growth slowed.

Investec Ireland chief economist Philip O'Sullivan said there is some evidence that Irish firms are responding to a softer demand with the rate of employment easing for a second month in a row.

"In last month's manufacturing PMI report we cautioned that the second quarter is likely to prove to be a tricky period for many Irish manufacturing firms ahead of the June 23 EU referendum in the UK."

In Britain, manufacturing activity barely grew last month, adding to signs that the economy is slowing in the run-up to a referendum on European Union membership.

Meanwhile, in its report the OECD said wages will continue to rise across the country, but said for inclusion a greater focus should be made on getting people back to work than on lifting pay. The economy is currently experiencing strong growth, in part, due to "temporary" factors in the multinational sector which have boosted investment.

The Government is warned that further tax giveaways risk overheating in the economy, while the lack of housing is raised as a concern.

Alan McQuaid, chief economist at Merrion Capital, said the report reflects the positive sentiment surrounding Ireland at the moment, but that cautionary noises must be heeded.

"The OECD are saying that growth is robust; and in fairness, we are doing better than most countries. But at the same time, there is an overall message in there saying 'You have to be careful'.

"There is a need for the Government to build the type of solid foundations that we can rely on into the future," he said.

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