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Tax rises needed to prevent economy overheating – ESRI

Tax rises needed to prevent economy overheating – ESRI

The Economic and Social Research Institute says the economy is now growing so strongly that the Government should increase taxes to avoid overheating, notably through increasing taxes on carbon and property.

But it also says the Government should avoid tax increases if there is a no-deal Brexit.

In its latest quarterly bulletin, the ESRI says the economy should grow by 4% of GDP this year and 3.2% next year.

It expects unemployment to average 4.5% this year, falling to 4.1% next year.
Private consumer spending is expected to grow by 2.5% and 2.3% respectively, but Government current spending will grow by 7% this year and 5.3% next year.

Investment is forecast to grow by 7.1% this year and 7.6% in 2020, while inflation is expected to be 1.4% and 1.7% in those years.

The Irish economy is growing strongly and is probably performing at full capacity.

Unemployment is down to 4.5%, wages are growing at about 4%, and the Government is spending more, especially on a very large investment programme.

Such is the pace of spending and output growth, the ESRI says the Government ought to take some of the heat out of the economy by raising taxes, particularly carbon tax and property tax, leaving taxes on labour alone so as not to harm employment.

The authors write: “Given the expected increase in capital expenditure over the short to medium term, it may be advisable to run an explicitly counter-cyclical fiscal policy and instigate a mildly contractionary budget.

“Taxation increases in the area of carbon taxes or residential property taxes could be used to reduce some of the demand – side pressures which are now evident in the domestic economy.”

It also warns that the planned increases in the Government’s capital programme for building infrastructure needs more careful management.

It said avoiding cost escalations such as the National Children’s Hospital, requires “improvements in the process of overseeing such projects are required” to ensure the initial estimates of the project costs are much closer to the final costs.

But these projections assume Britain stays in the EU. In the event of a no-deal Brexit, the economic shock will cut the growth rate by about two thirds.

Indeed, the ESRI says the prospect of Brexit is already having an impact on the economy by depressing consumer confidence and spending.

It says the usual determinants of consumer sentiment, notably unemployment and inflation, are both extremely low, and cannot account for the sharp deterioration in consumer sentiment observed over the past eight or nine months.

Given the past data on the link between sentiment and spending behaviour, the ESRI believes the economy has already been adversely affected by the amount of attention on Brexit and the uncertainty surrounding it.

If there is a no-deal Brexit, it says contractionary budget policy would have to be abandoned in favour of measures to support the economy.

All of which makes framing October’s Budget extremely difficult.

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