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Quarterly Economic Observer, Summer 2015

Quarterly Economic Observer, Summer 2015

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Summary

This edition of the NERI’s Quarterly Economic Observer (QEO) outlines our latest expectations for the economic outlook in the Republic of Ireland and Northern Ireland (Section 3) and discusses a strategic approach to fiscal policy in the Republic of Ireland (Section 4).

Outlook for the Republic

We anticipate that the Republic’s economy will grow at a reasonably robust rate for the duration of the forecast period (2015 to 2017), albeit with growth moderating year-on-year. The economy remains below its potential output level, and, driven by strong but declining employment growth, is projected to grow faster than the economy’s long-run average potential growth rate out to 2017.

The unemployment rate will continue to fall. We project that by mid-2016 the number of persons unemployed will have fallen below 200,000 and that by-end 2016 the number of persons employed will exceed 2,000,000.

Based on the assumptions and expectations outlined Section 3, our current projections for the Republic of Ireland include:

  • — Strong GDP growth of 3.7 per cent in 2015, declining marginally to 3.5 per cent in 2016.
  • — Consumption will continue its recovery driven by rising real disposable incomes, improving household balance sheets and a strengthening labour market while investment will grow strongly from its currently low base.
  • — The strengthening economy will boost the public finances with the deficit falling to around 2.4 per cent in 2015 and 1.8 per cent in 2016.
  • — Unemployment will steadily decrease out to 2016, with the 2015 figure averaging 9.7 per cent and the 2016 figure averaging 8.9 per cent.
  • — Employment growth will be close to 2.2 per cent in 2015 and 1.9 per cent in 2016.

Outlook for Northern Ireland

The outlook for Northern Ireland economy has weakened given the result of the UK general election and the negative implications for public spending and aggregate demand. The lead up to the In/Out referendum on membership of the European Union will generate significant uncertainty, delay investment decisions, and undermine the attractiveness of Northern Ireland as a location for foreign direct investment.

Strategic Fiscal Policy in the Republic of Ireland

Section 4 discusses the implications of the European Union’s fiscal rules for budgetary policy in the Republic of Ireland in 2016 and beyond:

Adherence to the medium-term budgetary objective limits the space available for increasing public spending in the Republic of Ireland to near €1.0 billion per annum until at least the end of 2018, and potentially for longer depending on how the structural budget balance is estimated in future years.

  • — Much of this fiscal space will be absorbed each year by demographic pressures on public spending.
  • — We reject as inappropriate the proposed 50-50 split between revenue and expenditure measures given the far from optimal growth and equity implications of that split and the currently low levels of government revenue and spending.
  • — It is our view that there is no scope for reducing the tax take in Budget 2016 given the pressures on the expenditure side.
  • — We argue instead that long-run economic growth, employment and equity goals can best be achieved by prioritising use of the available fiscal space to increase public capital investment levels.
  • — In addition, we argue for a modest increase in social spending funded by a set of growth-friendly reforms to increase total government revenue.

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