In its latest Quarterly Economic Observer the Nevin Economic Research Institute (NERI) has said the best way to sustain Ireland’s growth in productivity over the long-term is to invest in education and skills, infrastructure and new technologies.

NERI reports that the Republic’s was the fastest growing economy in the EU in the first half of 2015, with indications of strong growth for the rest of the year. The Institute has urged the government to reconsider its plans to cut the overall level of taxes in Budget 2016 and to take a more strategic and long-term approach to growing the economy.

The report says that the economy’s potential to grow depends on its ability to generate productivity gains year-on-year, and that the Republic’s productivity growth has been falling since the 1980s.

NERI projects that the government’s general budget deficit will fall to 1.7 per cent of GDP in 2015 and 1.1 per cent in 2016. The report also says that the gross debt-to-GDP ratio will fall to 91.3 per cent of GDP in 2017. “This is still a high level and the Republic will remain vulnerable to an adverse interest rate shock.”

Tailwinds

The report outlines how the economy is benefiting from a number of ‘tailwinds’ including:

• The depreciation of the Euro against the US dollar and UK Sterling
• The boost to private consumption and investment from the fall in oil prices
• Loose monetary policy
• The mild stimulus announced in Budget 2015
• ‘Pent up’ demand and improving confidence translating into consumption and investment after years of weak domestic demand
• The closing of the output gap as employment continues to fall.

It says the weaker Euro is particularly important for a small open economy like the Republic, while lower energy prices are boosting real disposable income.

Jobs

Total employment will exceed 2,000,000 sometime around the middle of 2016. The report says “The scarring effect of the recession and the high-rate of long-term unemployment suggest the structural rate of unemployment is higher now than it was before the recession. This implies a need for innovative labour market policies in the years ahead.”

NERI has proposed a set of policies designed to increase the economy’s future potential output. For example, the establishment of an infrastructure bank, increased funding for research and development and early years learning, increased support to prevent child poverty, and a phasing out of most, though not all, government subsidies and tax breaks.

NERI has also proposed a number of reforms to reduce barriers to labour market entry, including subsidies for childcare and the gradual tapering of family supports along with income.