Budget cuts of more than €3bn will choke spending, warns Bloxham
THE Government should encourage people to spend, not save, as the economic outlook weakens, a new analysis says.
Bloxham Stockbrokers' chief economist Alan McQuaid has sharply reduced his forecasts for next year from a 3.5pc expansion in GDP output to 2.5pc.
Mr McQuaid argues strongly against further tough fiscal austerity measures in the December budget, even though slower growth threatens government targets. Department of Finance forecasts last December also expected growth of around 3.5pc but this is likely to be scaled back in pre-budget estimates. Finance Minister Brian Lenihan has suggested budget corrections may have to be bigger than the €3bn planned to keep to a deficit of 10pc of GDP next year.
"The Government should resist the temptation to deliver more than the promised €3bn in savings in the misguided belief this will appease the markets," the report says.
"The fragility of the economic recovery should be a clear warning sign ... that increasing the personal tax burden further at this juncture runs the serious risk of pushing the economy backwards again."
The report suggests a plan to reward those who spend their money in the economy. "We feel it has got to be in some form of voucher scheme, with the benefit only coming to the taxpayer if he/she spends a specific amount in the shops," it says.
"Government doesn't appear to have a coherent plan as regards the household sector, with the introduction of the National Solidarity Bond a clear incentive for consumers to save rather than spend."
Although he does not expect a second global recession, Mr McQuaid said in his latest quarterly outlook that there are clear signs of a slowdown, especially in the US.
With exports the only likely source of growth in the Irish economy, the weaker global outlook means the outlook for the Irish economy is not as bright as previously thought.
Bloxham now expects unemployment to peak at over 14pc -- up from earlier forecasts of 13pc -- and it could be higher still.
"Further losses in the construction, financial services and retail sectors seem inevitable over the next few months. It now looks like the jobless rate will hit 14pc before the year is out, and will peak between 14pc and 14.5pc next year -- but with the risks now tilted back to the upside," the report says.
The report expects house prices to drop by around 15pc on average this year. "We think house prices should rise on a five-year view as the labour market returns to normal. The level of any increase is likely to be only in single digits."
Alan McQuaid on the bond market vigilantes: Page 4