Ibec warns Government spending on Covid will limit potential for tax cuts

The massive rise in Government spending necessitated by the pandemic will limit the potential for future tax cuts, Ibec has warned.

In its latest quarterly assessment of the economy, the employers’ group said the Government faced “a tricky glide-path to reducing the deficit to sustainable levels” as the economy recovers.

It called for renewed budgetary discipline to ensure resources continue to be available to fix “priority economic challenges” such as infrastructure, housing, population ageing and climate change.

In its report Ibec doubled its growth forecast for the economy to 6.5 per cent, up from 3.1 per cent previously, on the back of strong export growth and a rapid recovery in consumer spending.

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While Ireland was a few weeks behind much of the EU in terms of reopening, the full lifting of restrictions should trigger a positive bounce in retail, it said.

However, it cautioned that the stronger-than-expected growth was reflective of a “ very unstable period with Covid-driven base effects, Brexit and other international dynamics”.

It noted that Ireland had long-standing infrastructural deficits, significant Government policy commitments in areas like health, pensions and the labour market and ambitious climate targets to meet.

"All of these will have challenging implications for economic growth, business competitiveness and tax revenues in the years ahead," said Ibec's chief economist Gerard Brady.

“At the same time Covid-19 has left its mark on the State’s balance sheet. This needn’t mean a return to austerity, but it will constrain options for new, unfunded, day-to-day spending or tax cuts in the future.

Decisions

“The ability of the State to continue or repeat its fiscal heroics of the past 18 months is not infinite. It will mean we must be more strategic in our decisions and target resources at the generational challenges we face in areas like infrastructure, climate change, ageing, and competitiveness in an era of global corporate tax change,” Mr Brady said.

Tánaiste Leo Varadkar Leo Varadkar has suggested that a package of tax cuts for workers could be included in the forthcoming budget despite concerns from Fianna Fáil and others about the potential €2 billion cost.

The Government is expected to warn unions and employers’ groups at the opening of the National Economic Dialogue on Monday that public spending on Covid will soon be reduced, and that future spending increases on pensions, healthcare and climate action will have to be financed by spending cuts or tax increases.

It is expected to say that the Government “has pursued a counter-cyclical approach during the pandemic” by supporting the economy with massive deficit spending, but to be effective budgetary policy must be counter-cyclical during recovery.