Quarterly Economic Observer - Autumn 2016 - "Budget Policy for Inclusive Growth in the Republic of Ireland"

This edition of the NERI’s Quarterly Economic Observer (QEO) outlines our economic forecasts and assessment of risks for the Republic of Ireland and Northern Ireland (Section 3) and provides an examination of the potential for Budget 2017 to support sustainable and inclusive economic growth in the Republic of Ireland (Section 4).

NERI QEO Press Release here and Executive Summary NERI QEO here

 Projections for Output, Earnings, the Public Finances and the Labour Market (Republic of Ireland)

Economic Outlook for the Republic of Ireland

• Internal and external factors are not as favourable to growth as they were in 2015. Even so, we are projecting that real GDP will grow at a solid and above trend level of close to 4.1% in 2016, and by 3.7% in 2017 and 3.6% in 2018
• The labour market should continue to strengthen with employment growth of 2.6% in 2016 and moderating but still healthy employment growth in 2017 and 2018. The unemployment rate should be below 7% by the end of 2018.
• The deficit in the public finances should improve to around 0.5% of GDP in 2017 assuming full use of the available fiscal space. We project a modest surplus of 0.1% of GDP in 2018 and a gross debt to GDP ratio of 69.5%.
• Our baseline forecast is subject to a wide range of risks. Brexit remains a downside risk as our baseline forecast is for a negotiated settlement that minimises change to the UK/EU trading relationship. A more significant change to the trading relationship will impact negatively on our forecast.
• Other risks to the forecast include rising energy prices, weaker than expected productivity growth, and greater than assumed damage to the labour force arising from the recession and prolonged stagnation.

Outlook for Northern Ireland

• The outlook must be divided between the short-term and the long term. Long-term prospects will be dependent on the shape of the political negotiations on Brexit.
• In the short-term the uncertainty surrounding the Brexit negotiations could be countered by the advantages of a weaker currency, by more expansionary fiscal policy and by loose monetary policy.
• The long term outlook for Northern Ireland will be driven pre-dominantly by how well the eventual Brexit scenario suits the needs of the economy. It is likely the overall impact on the economy will be negative and significant. Particular problems arise for Northern Ireland in the scenario where there is a divergence between its requirements and those of the UK.

Budget Policy for Inclusive Growth in the Republic of Ireland

• There is limited fiscal space available over the next five years. Accommodating demographic and price pressures will absorb much of this space. This is in the context of currently low levels of public spending by Western European standards.
• Existing and future spending pressures mean that the case for cutting taxes in Budget 2017 is very weak. Average rates of combined income tax and employee social security contributions are significantly below OECD averages for both low and middle income earners.
• Economy-wide long-run productivity growth can be enhanced by increasing the per capita public spend on infrastructure, education, and Research & Development to Nordic country levels.
• State provision of subsidised childcare, the gradual tapering of family supports along with income and the introduction of refundable tax credits as a form of in-work benefit are all examples of policies that could support higher labour force participation.
• We can reorient fiscal policy in favour of greater wealth and income equality with only limited or even positive impacts on potential growth. Effective ways this can be done include reducing the scale and scope of available tax expenditures and increasing taxes on net wealth, intergenerational wealth transfers, and property, most notably immovable property such as land and housing.
• Finally, inclusive growth means that everyone should benefit from a growing economy. To maintain existing levels of economic well-being across all segments of society it will be necessary to increase welfare payments and disposable income for low income and low paid households in line with cost of living increases.