Q1 Economic Outlook: Growth to hit 5.4%, prioritise tax cut

Ibec, the group that represents Irish business, today said the economy will continue to outperform the rest of Europe and grow by an impressive 5.4% this year (GDP forecast revised up from Q4 2014 forecast of 4.8%).

In its new Q1 Economic Outlook (pdf link below), it said a combination of favourable exchange rates, quantitative easing and lower oil prices will result in strong growth this year and next, with unemployment falling below 9% this year. Ibec said that despite the stronger than expected recovery, Government still has limited room for fiscal manoeuvrer. It should prioritise cuts to the marginal tax rate for all workers and ambitious investment in capital projects, education and innovation in the upcoming Spring Statement.
On pay, Ibec Head of Policy and Chief Economist Fergal O’Brien said: “Economic growth will in time translate into pay increases across the economy, but different sectors and companies are recovering at different rates. Two-thirds of domestic services companies and half of traditional manufacturing companies are unable to afford pay increases this year. Public sector pay cuts are likely to be reviewed over the coming years, but productivity improvements must be maintained and pay levels should not be allowed to drift way of line with competitor economies again. Public sector pension reform is urgently required and it must be part of any review of public sector remuneration.
On exchange rates Mr O’Brien continued: “Quantitative easing has led to a dramatic fall in the value of the euro. While some input costs will increase, the weak euro is a major bonus for exporters. Ireland will benefit more than any other eurozone country because of the high level of trade with the UK and US, butthe increased cost of some imports will offset a portion of the benefits. These higher import costs are also likely to feed through to consumer prices over the coming months.”
On the Government’s upcoming Spring Statement, Mr O’Brien said: “Strong growth can be maintained, but only if we manage the recovery sensibly. The Government should commit to reducing the punitive marginal tax rate for all workers, actively encourage entrepreneurship and invest much more in the future of the country. The policy of continuing to tax high skilled workers at a penal 52% rate does not make economic sense and should be abandoned. These policy changes can be delivered while also reducing the deficit and debt levels, and prioritising balanced recovery across different sectors and regions.”
Ibec’s five priorities for the Government’s upcoming Spring Statement:

  1. Reduce punitive marginal tax rate: Our income tax system is the most progressive in the developed world, but there is a trade off between this redistribution, the incentive to work and the ability of companies to attract and retain talent. The marginal tax rate remains punitive and the creation of third tier on earnings over €70,000 in the last budget was short-sighted and misguided.
  2. Stop penalising entrepreneurs: With the higher rate of USC, the lack of an equivalent to the PAYE credit and the higher rates of capital gains tax introduced in recent years, our tax system has gone in the opposite direction to much of enterprise policy. If we are truly serious about creating a high skilled entrepreneurial economy these issues should be addressed. 
  3. Ramp up capital investment: Record low interest rates offer a once in a generation chance to invest ambitiously in the country’s future. The Government should commit to spending 4% of GDP on  infrastructure by 2020. Housing under supply in key urban centres has the potential to undermine competitiveness and make it more difficult to attract and retain talented workers. The government needs to do much more to address supply shortages. Our transport network is also far from complete.
  4. Priorities education and research: We need to start reversing the cuts to education and research spending now. This includes ensuring the resources are in place to promote literacy and numeracy, reform the junior cycle, support the professional development of teachers, adequately fund third-level and encourage R&D.
  5. Review public sector pay, but do it sensibly: As economic circumstances improve it is appropriate that public sector pay rates should be reviewed. The process must take into account the State’s limited ability to finance pay increases, relative pay levels in the public and private sectors, international competitiveness and the need for pension reform. Ongoing change and productivity must remain a central element of any review of public sector remuneration.

For more please click: http://www.ibec.ie/IBEC/Press/PressPublicationsdoclib3.nsf/vPages/Newsroom~q1-economic-outlook-growth-to-hit-5.4,-prioritise-tax-cut-13-04-2015?OpenDocument#.VSvh-rlOOP8

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