There is no scope for reducing the tax take in next October's budget given the pressures on expenditure, the Nevin Economic Research Institute (Neri) has warned.
In its latest quarterly outlook, the union-backed think tank argues the limited “fiscal space” available to the Government will be needed to absorb demographic pressures on the public spending and the new public pay deal.
Inappropriate split
It also rejected the Government’s proposed 50-50 split between revenue and expenditure as “inappropriate” at this stage, arguing that tax cuts tended to favour high-income households.
The Government has signalled plans for an expansionary budget of €1.2 billion to €1.5 billion, a move that is expected to cut the budget deficit to 1.7 per cent next year.
The institute said while the Government’s adjustment did not strictly meet European Union fiscal rules, it would improve the State’s budget deficit and therefore was “sufficiently prudent”.
Neri economist Tom McDonnell said it would be wrong to say the adjustment was “in any way reckless” as the State was still improving its structural balance . Nonetheless, he said the room for manoeuvre was likely to remain tight for at least three years.
The institute predicted the economy would expand 3.7 per cent this year, which is roughly in line with other forecasts, before declining marginally to 3.5 per cent next year.
It predicted unemployment would continue to decrease, hitting an average of 8.9 per cent next year. By mid-2016 the number of unemployed people in the State will have fallen below 200,000, having climbed above 400,000 at the height of the crash, it said.
Strengthening economy
The strengthening economy would boost the public finances, with the deficit falling to about
2.4 per cent this year and 1.8 per cent in 2016.
In its report, the institute proposes an alternative €1.2 billion adjustment package to that proposed by the Government in its spring statement.
This rules out tax breaks but includes €850 million in additional spending commitments to cover demographic pressures (€300 million), the new public pay deal (€300 million) and additional anti-poverty measures (€250 million).
It also includes an additional €1 billion in spending on research and development.
“Given the extremely low levels of public capital investment and government spending on R&D, combined with the scale of the potential benefits to economic growth, it appropriate these areas should receive large allocations of available resources,” it said.
It said it would bring the overall adjustment down to €1.2 billion by reforming various tax expenditures, introducing a new net wealth tax on incomes above €1 million and by beefing up anti-fraud measures.
