Domestic spending has overtaken exports as the key driver of growth in the Irish economy, according to the latest research from the ESRI.
It’s a shift compared to the earlier phase of the Irish recovery which was driven largely by a surge in exports.
“There is now a considerable contrast between the domestic and external components of growth. With the former, investment and, particularly, consumption are fuelling present growth rates. On the external trade side, there is evidence of a softening of the growth performance,” according to Professor Kieran McQuinn of the ESRI.
Over-reliance on domestic demand was a key feature of the Irish economy in the run-up to the crash, especially demand for housing.
Dr David Duffy, also of the ESRI, said it would prefer to see more balanced growth – with exports and domestic demand rising in tandem.
However, he said the latest shift away from export growth appears to reflect external rather than internal factors.
“(It’s) not a deterioration in competitiveness, so far,” he said.
The ESRI, in its latest quarterly economic commentary, has revised down its growth forecasts for 2016 and 2017, including to take account of the fallout from the Brexit vote in the UK last June. GDP is expected to grow by 4.3pc in 2016. Forecasts for GDP growth in 2017 has been revised down to 3.8pc.
Confusions, including those caused by the surprise 26pc growth rate reported for the Irish economy last year, make forecasting important economic elements, including the State’s corporation tax income, difficult, the researchers said.
It says the Irish economy is broadly in balance this year – and therefore says tax cuts or spending increases are not needed, according to the ESRI.
“Budgetary policy should be neutral. It’s important to keep the income tax base as stable as possible as a component of the overall tax base,” said Prof Kieran McQuinn.
A recent surge in corporation tax should not be used to justify income tax reductions, he said, comparing it to the boom when the State allowed its reliance on income tax to fall on the back of unsustainable stamp duty and capital gains receipts.
“We need to heed the lessons of the past,” he said. With evidence that Irish taxpayers are hit with higher rates at lower incomes than workers in other developed countries, he argued that any tax cuts for middle income earners – including reduced USC rates – should be matched by taking more lower income workers into the tax net, or hitting higher earners.
The ESRI said there is no evidence that tax changes are needed to entice more workers into the labour force. However, it favours increased public spending to boost housing supply.
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