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No more austerity needed to hit Budget target, says Goodbody - and we could even cut income tax

The latest quarterly report from Goodbody Stockbrokers has some positive points on the Irish economy.

Image: Tim Goode/PA Wire

THE IRISH GOVERNMENT can meet its budget deficit target next year without introducing any more austerity measures, according to the latest quarterly report from Goodbody Stockbrokers.

Ireland could hit GDP growth of 3.5% a year over the next three years, the report says, with domestic demand growing 2.9% and 3.1% in 2014 and 2015 respectively.

The report adds that a projected €500m intake through already-announced water charges could allow the Government “some scope” for improving medium-term growth capacity with measures such as cutting income tax or reversing some of the capital spending cuts introduced in recent Budgets.

Goodbody also anticipates a drop in unemployment to 10.7% by the end of this year, and to 8.5% in 2016.

Goodbody Chief Economist Dermot O’Leary said: “Our preference is for Government to implement measures that will increase the medium-term potential of the economy.”

“These should include a widening of the income tax bands; a reduction in the higher rate of tax, which, including the universal social charge, is one of the highest in the EU; and a refocusing on capital expenditure, which has collapsed over recent years and remains at its lowest since the late 1980s as a percentage of GDP.”

O’Leary said that improved growth and a reduced focus on austerity offers a good opportunity for the Government to “restructure taxes and Government spending to sustain the recovery”.

There is a secondary benefit in that lower taxes and higher capital expenditure help relieve upward wage pressure in certain segments of the private sector, meaning corporates and small business can use any surplus income for investment, including business expansion and job creation.

Selling debt

The Goodbody’s report notes that Ireland’s “fiscal position would also benefit from refinancing €20bn of IMF loans over the coming years”, saving some €400m a year (or 2% of GDP) in interest costs.

The stockbroker recommends that the NTMA manages this by selling debt “beyond its traditional 10 year time frame” to take advantage of “record low market interest rates”.

“The IMF recently gave its support for an early repayment of its loans to Ireland,” O’Leary said.

“While this is subject to agreement with its EU partners, there are significant savings to be made by such a measure, given that the debt currently attracts an interest rate of 4.99%.”

Property prices going up

Goodbody says supply shortages are driving recent acceleration in prices for both commercial and residential property.

Although the construction sector is showing signs of “rebounding”, supply will continue to be an issue and so prices are expected to continue to rise.

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