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Goodbody: No more austerity Budgets

Wednesday, August 20 10:33:59

No new austerity measures are needed for the Government to hit its 3pc deficit target in 2015, according to an update from Goodbody's economist, Dermot O'Leary this morning.

He said that the Government now has an opportunity to use October's Budget for growth enhancing measures that could give the economy a much-needed extra boost.

The latest "Health Check" report from the stockbrokers expects GDP growth of 3.5pc per annum over the next three years while unemployment should fall to 10.7pc by the end of this year, and to 8.5pc in 2016.

It says that the Irish economic recovery has gained momentum over recent months, with a host of indicators suggesting that the recovery is gaining strength and becoming more broad based.

Goodbody believes that the Government can reach the "hallowed ground" of a sub-3pc of GDP budget deficit in 2015 with no net additional austerity measures.

Notably, the water charges that have already been announced will bring in E500m, leaving scope for the Government to focus on measures that improve medium-term growth capacity, including a reduction in the income tax burden and the reversal of some of the capital spending cuts of recent years, Mr O'Leary said.

The fiscal position would also benefit from refinancing E20bn of IMF loans over the coming years, saving at c.E340m per annum (0.2pc of GDP) in interest costs. The NTMA should do this by selling debt beyond the traditional 10 year time frame, taking advantage of record low market interest rates, says Goodbody.

"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. The upward momentum in the Irish economy affords the opportunity 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," he said.

"The IMF recently gave its support for an early repayment of its loans to Ireland," said O'Leary. "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 4.99pc. Our preference would be for the NTMA to go beyond its traditional 10 year time frame in refinancing these loans in the market with interest savings of c.E340m per annum a possibility."

On the property market, Goodbody says supply shortages are the key driver of recent acceleration in both residential and commercial property prices. While there are signs that construction activity is rebounding, supply will continue to be a problem, pushing prices higher. Prices are still cheap in an historical context, but an increase in supply is necessary to declare the recovery a "quality" one.

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