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Tax rises should be considered in October's Budget to prevent economy overheating, ESRI recommends

The think tank says the economy is “now effectively operating at full capacity”.

Image: Shutterstock/Barat Roland

THE IRISH ECONOMY will continue growing this year and next despite considerable uncertainty around Brexit and deteriorating trade relations between the US and China. 

That’s according to the latest economic forecast from the ESRI, which is recommending the government consider raising taxes in October’s Budget to prevent the economy from overheating. 

However the think tank says this approach should not be considered in the event of a no-deal Brexit at the end of October. 

The ESRI states that despite significant international uncertainty, the domestic economy is now expected to grow by 4% this year and a further 3.2% next year. These rates are marginally up on previous forecasts. 

However, the ESRI warns that these growth rates are subject to the assumption that the UK won’t crash out of the EU in October later this year as a result of a no-deal Brexit. 

The ESRI analysis suggests that Brexit and uncertainty in the US have already had a negative impact on the Irish economy. 

It also states that the unemployment rate is due to fall to 4% by the end of next year, with evidence of wages and costs increasing. 

“Given the particularly robust performance of the Irish labour market, it is clear that the domestic economy is now effectively operating at full capacity,” the ESRI states.

Taking this into account, forecasters recommend that the government run a “contractionary budget” in 2020 in order to prevent the economy from overheating. 

“This could involve the Government increasing taxes in areas which would not have a distortionary impact on the labour market,” the ESRI states. 

It recommends looking at increases in the areas of carbon taxes or residential property taxes and says these “could be used to reduce some of the demandside pressures which are now evident in the domestic economy”. 

The report states that all this would need to be revised in the event of a negative economic shock should the UK crash out of the EU in the case of a no-deal Brexit. 

Finance Minister Paschal Donohoe said earlier this week he will have to make an “informed judgement” or guess as to whether there will be an orderly or crash-out Brexit when he presents his budget on Tuesday 8 October. 

The minister is due to present the Summer Economic Statement next week. That statement, presented every June, sets out economic predictions for the country in the run up to the Budget in October. 

Two different scenarios will be set out in the statement – one for the approach if there is a no-deal Brexit, and one in which a deal is agreed.

“I will be ensuring we produce a budget which is in line with our commitments that we have with the European Union and the timings in line with every other budget that I have done. What I will be doing in the Summer Economic Statement which I will be doing next week, will be outlining different economic scenarios against which Budget 2020 will be formed,” added the minister.

“So we will be looking at the kind of economic scenario the country could face if we were to be in a deal scenario or a continuation of the status quo. What I will also be outlining is if a disorderly Brexit were to occur, what then would the backdrop be for us in the preparation of a budget,” said Donohoe.

- With reporting from Christina Finn and Daragh Brophy 

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Cormac Fitzgerald

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