The Economic and Social Research Institute (ESRI) has cautioned the Irish government against implementing tax cuts in the upcoming budget, stating that there is no clear rationale for reducing the overall tax burden. The think tank highlighted that the Irish economy is facing capacity constraints, particularly in the labor and housing markets, which pose a risk of overheating.
The ESRI revised its growth forecast for the economy downward due to a significant slowdown in exports from the pharmaceutical sector dominated by multinational companies. It now projects a GDP growth of just 0.1%, a substantial decrease from its previous forecast of 5.5%.
Kieran McQuinn of the ESRI emphasized the need for caution in injecting large sums of money into the economy, as there is a danger of overheating. While consumer spending continues to grow strongly and savings levels remain high, careful consideration must be given to where funds are allocated.
The government appears divided on the issue of tax cuts, with Taoiseach Leo Varadkar advocating for a €1,000 tax break for middle-income earners, while Finance Ministers Michael McGrath and Paschal Donohoe favor a more prudent approach aligned with the 5% spending rule.
The ESRI’s latest assessment indicates robust growth in the domestic economy, as measured by modified domestic demand. It expects this measure to expand by 3.5% this year and 4% in 2024, primarily driven by the anticipated lower rate of inflation. However, the institute warned of economic headwinds, including rising interest rates, slower global trade, and persistent inflation, which cloud the international outlook.
While headline inflation in Ireland is projected to decrease to 5% this year and 3% next year, the ESRI cautioned that if wage growth leads to wage-based price increases, an extended period of higher interest rates may be necessary to address inflation. European Central Bank policymakers share concerns about tight labor markets in Europe fueling upward pressure on prices and contributing to more persistent inflation than expected.
The ESRI forecasted a substantial budget surplus of nearly €10 billion this year and over €15 billion next year, primarily driven by buoyant corporation tax receipts.
