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Economy needs free spending despite ‘great concern’ over inflation

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Shoppers on Henry Street, Dublin. Photo: Gareth Chaney/Collins

Shoppers on Henry Street, Dublin. Photo: Gareth Chaney/Collins

Shoppers on Henry Street, Dublin. Photo: Gareth Chaney/Collins

Consumers, businesses and government need to take “collective responsibility” for spending their way out of the pandemic, a leading economist has said.

Neil Gibson, chief economist for consulting firm EY, told the Irish Independent that spending is necessary despite growing inflation fears.

“If we all keep our money for a rainy day, don’t be surprised if there’s nothing open. Businesses won’t survive if we’re not willing to maybe make some compromises - when it’s safe to do so.”

However, he said inflation is of “great concern” even though central bankers insist that recent price hikes are temporary.

“The accepted wisdom is that it’s a step, and that we will be through and back to normality quite quickly on prices.

“I think that we need to be realistic. There are enough conditions out there to say it could be something a little bit more challenging than that.”

A combination of rising wages, commodity prices and house prices could put governments in a difficult position next year, he said.

“I’m not saying that means policymakers should be doing anything too significant at this point - worrying about interest rates at the European level or maybe starting to think of cutting back spending and austerity - but don’t ignore it. Don’t just assume that it’s going to go away.”

Eurozone inflation tipped the European Central Bank’s 2pc target in May before falling slightly to 1.9pc in June.

The ECB indicated last week that it wouldn’t be increasing interest rates - one of the main ways to curb spending - or paring back its pandemic bond buying any time soon.

Meanwhile, Mr Gibson said government spending may need to be met with higher taxes, including a potential 15pc minimum tax rate for large multinationals.

“If we end up in the 15[pc] space, that doesn’t send alarm bells ringing about Ireland’s competitiveness as a location. It’s still the lowest rate amongst the competitor nations.

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“The bigger question is, will be able to make good on our public sector commitments and demands from our citizens with the tax take that we have currently? And I think, even for an economy growing as fast as Ireland, that looks like a challenge.”

He spoke to the Irish Independent after a business webinar hosted by the Association of Chartered Certified Accountants (ACCA) this week.


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