Hiking taxes on workers to cover new spending would be a Budget mistake that would strangle economic recovery, a leading think tank warns today.
In a largely upbeat economic forecast, the Economic and Social Research Institute (ESRI) said the Government had room to borrow and should avoid covering all new spending by higher taxes.
“Ensuring that we maintain our competitiveness means that we don’t increase substantially the tax burden on workers generally in the economy,” said Kieran McQuinn, a research professor with the ESRI. “There should be some element, maybe through borrowing, and some element through increased taxation, but be wary of increasing the tax burden generally.”
The ESRI also warns that the recovery from Covid-19 has contributed to inflationary pressures, stemming mainly from global supply-chain problems and energy prices.
It says these factors are expected to be temporary, but there are inflationary risks here from a rapid recovery in household spending, as well as how price changes feed into wage expectations.
The think tank said its expectation was that inflationary pressures would peak by end of this year and abate in 2022. It expects inflation of 2.3pc in 2021 and 2.5pc in 2022.
The ESRI advice came as the leader of the country’s largest public sector union indicated that pay rises will have to keep pace with inflation.
Kevin Callinan, general secretary of Fórsa, said inflation was now about 2.85pc and it was a “good time to reflect on how policy should drive a determined effort to emerge from the pandemic, with ‘no one left behind’ becoming more than just a slogan.”
He said that if inflation was sustained, there would “be a renewed focus on the cost of living” when negotiations on a new public-service deal got under way. He added that Government ministers “have acknowledged that there will have to be pay increases to meet these pressures”.
The ESRI report comes less than a week before Budget Day, and just as the Government is set to agree to a global minimum corporate tax of 15pc for multinationals with more than €750m in global revenues.
But Mr McQuinn believes the corporation tax move may not penalise the economy in the eyes of foreign investors.
“The Irish authorities are almost being heavily cajoled, shall we say, into adopting it – so it doesn’t reflect a change in attitude by Ireland Inc.
“I don’t think it’ll have the huge, catastrophic effect that maybe people might be concerned about – in terms of either its impact on receipts or its impact on employment.”
The ESRI is optimistic about Ireland’s prospects, with overall growth expected to reach 12.6pc this year, or 7.1pc if you strip out the effects of multinationals. Consumer spending will jump 7.5pc this year and 8pc in 2022, after a 10pc drop last year.
Unemployment has already started falling and will drop to 7.1pc in 2022, the ESRI forecasts. Exports will rise by 14.3pc, after a 9.5pc surge in 2020, boosted by foreign pharma and IT firms, who escaped the pandemic pinch.
Housing is also a concern, with low supply and high prices reducing Ireland’s attractiveness as a place to live and do business.
The private sector is expected to complete just 10,000 housing units this year and next. House prices could also push up overall inflation.
“The supply problems that were there before the pandemic are now almost exacerbated, and so the danger therefore is you could see this kind of uptick in house prices,” Mr McQuinn said.
However, the ESRI is calling for “significant investment” in housing.