Monday 21 January 2019

'Don't mess up rewards of economic recovery' - ESRI

Personal tax cuts shouldn't be considered, says think-tank

Cuts to personal taxes can’t be given if the Government wants to spend money boosting infrastructure. (Stock Photo)
Cuts to personal taxes can’t be given if the Government wants to spend money boosting infrastructure. (Stock Photo)

Colm Kelpie

Taoiseach Leo Varadkar has been warned not to blow the rewards of economic recovery by repeating the giveaway mistakes of the last boom.

And cuts to personal taxes can't be given if the Government wants to spend money boosting infrastructure, a leading think-tank warns.

The Government is planning to gradually ramp up public capital spending over the coming years to address the lack of infrastructural spending during the crisis years.

Mr Varadkar has also admitted that the country's "very high income tax rates are a serious problem" in attracting talent into the economy.

But the Economic and Social Research Institute (ESRI) said the Government would need to exercise restraint in spending in other areas to avoid a repeat of the boom years. And it issued the stern warning on cutting taxes, even though the economy is set to shrug off the pressures of Brexit and continue to grow strongly next year.

"My own feeling is that we can't afford to simultaneously aggressively cut personal taxation rates while also addressing those infrastructural deficits," said Kieran McQuinn, ESRI research professor.

ESRI’s Kieran McQuinn. Photo: Frank McGrath
ESRI’s Kieran McQuinn. Photo: Frank McGrath

The Government has set out plans for a €116bn capital spending plan over the next decade designed to boost the country's infrastructure.

But Mr McQuinn said prudence in spending elsewhere would be needed to avoid the mistakes that preceded the crash.

"Otherwise, we'll have the real risk that we'll get back to the situation that we were in between 2004 and 2007, where we were significantly increasing capital expenditure and we were also increasing current expenditure, and also cutting taxation rates," Mr McQuinn said. "We were really fuelling the economy.

"If we want to address the infrastructural deficits, then we will have to show particular restraint on the current side."

The ESRI said that overall the economy was continuing to show strong signs of momentum. The unemployment rate is now below 6pc and the ESRI expects it to fall to 4.5pc next year.

Economic growth, as measured by GDP, is forecast by the think-tank to expand by 4.8pc this year, and 3.9pc in 2019, despite this being the year that the UK leaves the European Union.

The ESRI said that another "robust" performance by the economy was expected in 2018, and that there would be further significant growth next year meaning that, in terms of the headline figures, the economy will have recovered from the crash.

"It is increasingly clear that the main macroeconomic policy challenge over the coming 18 months will be to ensure that the growth enjoyed by the economy is sustainable over the medium term.

"This will almost certainly entail the relevant authorities displaying restraint in terms of both fiscal and macro prudential policy."

Mr McQuinn said that the Government can make decisions in regards to personal taxation, such as increasing the threshold for entering the high rate of tax, but it would have to "tighten" in other areas.

He said the overall tax package would have to be neutral. He also said the Government may have to consider not spending all the money it is allowed to next year.

"The amount of fiscal space is set to increase substantially," Mr McQuinn said.

"It may well be the case that the Government shouldn't spend all the fiscal space, particularly on the current side."

The ESRI commentary also noted that given the strength of the growth in the economy, there could be "capacity constraints", particularly in the labour market.

It also cautioned about the over-reliance on corporate tax revenues.

Irish Independent

Also in Business