We need a change of course and we need it now

Posted on June 27, 2013 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

While caution is always advisable in examining the latest quarterly data, the release by the Central Statistics Office of the latest quarterly national accounts was something of a wake-up call to those eager for news of a recovery. The Republic of Ireland is in a deep stagnation. The downturn has lasted longer than any period of recession since the 1950s, here. A further contraction in personal consumption and investment in the first quarter of this year confirms a downward trend apparent in the second half of last year. This is disappointing but hardly surprising given the impact of austerity abroad and at home.

Recently we published an alternative budgetary approach that would stem the fall in domestic demand allowing breathing space for households and businesses.
Continuing stagnation in levels of demand will increase the risk that Government will not reach its fiscal target for 2015. A safer, more prudent and less damaging approach would encompass measures to accelerate investment which fell by 7% in one quarter. A growth-friendly budget would avoid making further cuts in public spending on education, health and social welfare - all areas which impact closely on personal consumption or investment. Government has choices - it can cut further and run the risk of depressing the economy further or it can transfer the fiscal pain to the top 10% of households who pay little more than one quarter of their total gross income in income tax, USC or PRSI. Raising taxes on high-income and high-wealth households by 2.5 percentage points would raise €600 million over two years. This coupled with an investment stimulus of 1% of GDP in 2014 and rising to 2% in 2015 could enable Government to reach the fiscal deficit target more quickly than under the present counter-productive and socially damaging austerity path.

Posted in: Government SpendingInequalityInvestmentMacroeconomicsTaxation

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