ESRI gives stark warning that tax increases may be necessary as Donohoe indicates more cuts
Finance Minister Paschal Donohoe has indicated he is planning income tax cuts in the next Budget, despite stark warnings that he needs to pare back Government expenditure.
The Economic and Social Research Institute (ESRI) believes Mr Donohoe needs to tighten the national purse in 2020.
It is advising the minister to hike both carbon tax and the local property tax in order to sustain public finances.
Conor O'Toole, a senior research officer with the ESRI, said: "We see quite rapid spending increases and that is feeding through into what we see as a deficit position this year and next year."
Mr Donohoe will be bringing his own economic update to Cabinet next Tuesday, which the Irish Independent understands will predict budget surpluses.
The minister is already under pressure over the escalating cost of the National Children's Hospital and criticism of his policies by the Irish Fiscal Advisory Council.
But yesterday he hinted that the next Budget will include some tax cuts for workers. October's Budget is scheduled to be the fourth and final one under the confidence and supply agreement with Fianna Fáil.
"It is the Government's position that workers start to pay too high a rate of income tax at too low an income level," Mr Donohoe said.
"We cannot hope to remain competitive if someone on a relatively low income and who decides to work a few hours overtime has nearly half that extra money taken in tax."
In last year's Budget he increased the entry point to the higher rate of income tax for all earners by €750 and reduced the third rate of universal social charge from 4.75pc to 4.5pc.
"This is steady progress in reducing the income tax burden for low and middle income earners," Mr Donohoe said, adding that currently "resources are available" to continue this approach.
However, the ESRI has today cautioned against a giveaway budget.
Mr O'Toole said the Irish economy is "really affected by global events, which suggests that domestic policy should really be putting resources by in good times so if there is an international shock they can use those resources". He proposed raising carbon tax from €20 per tonne to €35.
His colleague, research professor Kieran McQuinn, said the Government should focus on capital expenditure to address infrastructural deficits and try take some of "a little bit of steam out of the economy".
"In order to accommodate that, to prevent the economy from overheating, I think it is inevitable that we will have to tighten and have a contractionary budget," he said.