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The much-heralded  Spring Economic Statement has finally been issued1. It sets out the present economic and fiscal situation and will generate a debate about the nation’s economic priorities over the medium term. In a joint statement, Minister Michael Noonan and Minister Brendan Howlin gave a commitment not to “…go back to the days of boom and bust when windfalls were spent straight away and any downturn had to be met with immediate cuts”. Instead, they promised that tax and spending policy will be made on the basis of a prudent medium-term view of the economy and public finances”. So, the Statement provides a benchmark against which future economic performance can be measured.

Prospects for Budget 2016

The Statement provides the first indications as to what Budget 2016 (October 2015) might contain. On the basis of present estimates, Budget 2016 can include a package within the range of €1.2bn to €1.5bn, to invest in services, support employment, and boost growth potential, while still maintaining fiscal prudence.On the taxation front, the Statement contains a commitment to reduce the tax rate on low and middle-income earners while maintaining the income tax system’s highly progressive nature. There is also a commitment to allow investment to grow modestly in order to support the needs of a growing economy and society.

Continuing on Growth Path

The Statement highlights where recovery is evident in the economy.  Gross Domestic Product is growing strongly, exports are at historic highs, employment is expanding and the public finances are in a much healthier position. It is now a matter of consolidating that recovery. That calls for action in a number of areas, including:

  • Further creation of employment through Pathways to Work and the Action Plan for Jobs;
  • Investment in education and skills to ensure that the unemployed have the skills required by employers;
  • Re-balancing the tax system to make it more growth-friendly and ensure that it does not act as a disincentive to taking up employment; and
  • Adequate credit supply for SMEs through, for instance, the Ireland Strategic Investment Fund (ISIF) and the Strategic Banking Corporation of Ireland (SBCI).

Challenges ahead

Continuing economic growth depends on both external and domestic developments. On the external front, economic activity remains robust in the UK and the US. It will be important that such robustness continues in the medium-term. On the domestic  front, improvements in competitiveness and productivity have been central in ensuring the turnaround in the economy and the successful return to growth and employment in recent years. The Statement points out that “[i]t is essential that these improvements are not lost so that a solid base for sustainable growth in employment and living standards over the medium term can be maintained”.

Economic Outlook

Assuming positive external and domestic trends, the Statement forecasts steady economic growth over the next few years. This equates to medium-term potential growth rate of about 3% per annum. The Statement recognises that such growth should not be taken for granted. It depends on the right fiscal and economic policies being implemented. Table 1 shows the forecasts in the Statement for output, employment, unemployment and Government finances up to 2020. Significant improvements are expected under all headings.

Table 1


 

* % of Gross Domestic Product

Follow-up to Spring Economic Statement

The Spring Economic Statement is not an end in itself. There now has to be follow-up.  And that is scheduled to happen.It is proposed that a National Economic Dialogue will be held in July to facilitate open debate about the main structural challenges faced by the economy and society and what the options are for the allocation of public resources over the coming period. In addition, the Government is to examine the possibility of establishing an Independent Budget Office. This would allow for independent costings of policy proposals from political parties and Groups in the Oireachtas, taking into account second-round effects (i.e. economic) as well as looking over a multi-year horizon. However, the Statement admits that “… this is a policy that would only be fully in place after the next election”. In the intervening period, the current arrangements for the costings of Budget measures will continue and will be available on the basis of existing rules.