2015 growth to hit 5.9%, value of economy to expand by 11%
In advance of this week’s budget Ibec, the group that represents Irish business, today published it latest Quarterly Economic Outlook, which raises the forecast for GDP growth this year to 5.9% in volume terms.
Significantly, the economy is set to expand in value terms by an unprecedented €20 billion (11%) during 2015, leading to a rapid improvement in Ireland’s debt and deficit positions. Ireland is quickly shaking off the crisis-induced debt hangover, tax revenue is surging and we can finally afford to plan ahead with confidence and ambition. Tuesday’s budget needs to reflect this new reality.
Growth is now being driven by strengthening domestic demand, aided by external tailwinds from falling oil prices and a weak euro. However, Ibec also struck a cautious tone. While there is scope for significant further improvements in the domestic economy, the recovery will exacerbate housing, skills and infrastructure shortages. This demands decisive and immediate action.
Key points from Ibec’s quarterly assessment of the economy include:
- GDP to grow by 5.9% in volume terms and 11% in value terms in 2015
- Significant space left for catch up in domestic economy, with consumer spending (4%) and investment (25%) below peak.
- Government deficit will fall to 1.2% of GDP in 2016 with Ireland’s net debt to GDP ratio (including the retained value of the state’s shares in the pillar banks) falling under 70% by the end of 2016
- Unemployment set to fall below 9% by year-end as strong jobs recovery continues
- Signs of regional recovery improving with almost three-quarters of net employment growth outside Dublin.
Strong growth means there is no need for demand stimulus in Budget 2016. A modest expansionary budget is necessary, however, to relieve supply side pressures in the economy. Urgent investment is needed in infrastructure, education, innovation and housing, along with crucial tax reform to increase labour supply. Business it is looking for Budget 2016 to:
- Reduce the marginal rate of tax below 50%
- Reform Capital Gains Tax for entrepreneurs
- Move toward the equal tax treatment for self-employed
- Introduce the Knowledge Development Box
- Take decisive steps to boost housing supply
Ibec Head of Policy and Chief Economist Fergal O’Brien said: “Strong growth is now coming from a balanced mix of recovering domestic demand and external tailwinds. The economy is performing marginally ahead of our Q1 forecast of 5.4% due to a stronger environment in key trading partners. Dublin remains the main economic driver, but the regions are also on the up. The challenge now is to manage the recovery. Low oil prices and a weak euro will not last and significant under-investment over recent years has left us unprepared for a growing population and expanding economy. We need to invest much more in infrastructure, education and innovation.”
“The stand-out economic story of the year is the dramatic improvement in Ireland’s debt position. Not long ago many voices continued to claim Ireland would never overcome its debt burden. However, €20 billion growth in the value of the economy has led to tax revenues accelerating. Ireland’s debt to GDP ratio will fall to 99% this year from 124% in 2013. Our net debt to GDP, including the value of the state’s bank shares and cash reserves, could fall as low as 70% of GDP by the end of next year. The next government will have much more room to be ambitious as a result.”
“Much needed tax reform needs to be targeted where Ireland is out of line with our competitors. Our personal tax at below average earnings is amongst the lowest of any developed nation. The extreme progressivity of our system, however, means that for earners above this level Ireland quickly becomes a high tax country compared to the rest of the developed world. At earnings of just above €39,000, Ireland surpasses the OECD average effective income tax rate. By €80,000 Ireland has the sixth highest average income tax rate in the OECD at 34.6%, five percentage points higher than the OECD average.”