Wednesday 28 September 2016

State must break EU fiscal rules holding us back - Ibec

Published 14/07/2016 | 02:30

Fergal O'Brien, Head of Economics and Taxation at IBEC
Fergal O'Brien, Head of Economics and Taxation at IBEC

The Government should consider breaking strict EU fiscal rules which place "unnecessary" and "inappropriate" restrictions on investment, the country's biggest business body has said.

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Ibec said the rules, which are laid down by the European Commission to ensure prudent and stable public finances, should be adhered to for day-to-day government spending and taxation. But the group claimed they don't make sense in the Irish case in terms of capital investment.

Fergal O'Brien, Ibec chief economist, said the Government needs to take a renewed case to Brussels for flexibility.

But he said if that fails, we should defy the rules and spend what is required, particularly in dealing with the deficit in social housing. He said €1bn should be spent outside the fiscal rules for social housing next year.

"In the context of everything that's happening in the global economy, maybe we should go and do that and ask for forgiveness. Particularly on social housing," Mr O'Brien told the Irish Independent.

"Clearly the Irish Government has been knocking on the door in Brussels on this one, and they're not getting an answer. There is logic here where it's time to ask for forgiveness. We are faced with a situation in the public finances where it is not doable, it is not achievable, in terms of the pressures we have on the public purse in terms of services and that investment requirement, and the rules don't make any sense for an economy such as Ireland's with its investment deficit that we don't have any recognition of that investment need. "If all other routes are not working, maybe it's time to try that one."

Under the EU's Stability and Growth Pact (SGP), countries are obliged to adhere to strict debt and deficit targets set by the Commission. Ireland has moved from the corrective arm of the SGP, to the preventive arm, thereby freeing up more so-called fiscal space for spending.

The Commission has already agreed to a loosening of the rules in Ireland's case, which Finance Minister Michael Noonan has said results in an additional €1.5bn becoming available in fiscal space.

But in its Budget 2017 submission, Ibec argues that far too little is being put into investment. The minister told the National Economic Dialogue at Dublin Castle earlier this month that he agrees more money should be spent on investment.

But he said the Government was hamstrung by the fiscal rules. He also claimed larger countries like France and Italy had been given flexibility after they had broken spending rules.

Ibec also said the Government needs to realise that Budget 2017 will be the "first meaningful policy lever" that the Government is going to pull in terms of reaction to the Brexit vote.

Mr O'Brien said the Budget should also deliver a major overhaul to our personal and business tax offering, and he cautioned against another increase in the minimum wage.

Approximately 70,000 workers in Ireland are on the minimum wage, and the vast majority are women, according to research produced by the Nevin Economic Research Institute (Neri).

Most are aged in their 20s and 30s, and the bulk work in accommodation and food, and wholesale and retail.

The Neri research by Dr Micheál Collins also said that minimum wage workers are more likely to be on temporary contracts, work less than 20 hours per week, work part-time and be in the private sector. "Overall, those on the minimum wage represent 5pc of all employees, with 34,000 working full-time on the minimum wage," Dr Collins says.

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