A recovery of growth in output and in total employment is likely to be very slow in both economies of Ireland over the coming two years.
Economic activity remains depressed in some of the key trading partners and continuing fiscal austerity coupled with high levels of private debt are taking their toll on domestic demand. While there are some positive signals, with regards to service exports in the Republic of Ireland as well as a reduction in unemployment since early 2012, the overall outlook remains very challenging. This will continue to weigh on public finances where Government ambitions to reach the deficit target of 3% by 2015 very much depend on a range of circumstances not all of which are under full domestic policy control.
This Observer focusses on the option of pursuing a growth-friendly and jobs-rich approach to budgetary policy in the Republic of Ireland over the next two years. The approach has three main components:
- full use of the proceeds of the ‘Promissory Note’ deal to reduce the fiscal consolidation by €1 billion in 2014 and again in 2015;
- a fully commercial investment stimulus of €1.5 billion and €3 billion, respectively, in2014 and 2015; and
- further increases in taxation amounting to €1.65 billion and €700 million,respectively, in 2014 and 2015 targeted at households in the top 10% incomebracket as well as capital assets of those who can afford to pay more than they aredoing now.
Compared to the current trajectory of public policy and fiscal adjustment, and on the basis of an expected slow economic recovery in Ireland’s main trading partners, an alternative budgetary approach such as outlined in this Observer is very likely to:
- raise output and employment further and help accelerate the welcome recent downward trend in unemployment (Table 4.7 on page 46);
- avoid further damage to the quality of Ireland’s fragile public service and income support (page 34);
- avoid further increases in poverty (refer to Quarterly Economic Facts page 75);
- reinforce market confidence in Ireland through a policy founded on growth, investment and fiscal prudence (page 54);
- begin to address some of the key social and economic infrastructural short-comings in Ireland (page 35); and
- reduce the government deficit to 3% in 2015 (Table 4.6 on page 39).