Plans to cut tax may boost growth, says troika

Government plans for tax cuts and additional expenditure could increase growth this year, the troika says in its review of the country’s economy.

However the troika continues to have reservations over the Government’s refusal to put more money into bringing down the country’s budget deficit faster.

They also warn that the Government changes to Irish Water charges means it could have problems raising funds for needed investment and increase the budget deficit by €85m this year.

The report, from the visit by European Commission and ECB members of the troika to Dublin in November, is generally positive, projecting growth of around 3.6% this year and next.

Tax cuts and additional expenditures — which the troika had not been very supportive of — could add up to 0.3 percentage points to GDP growth this year.

But spending was higher than targeted and the supplementary budget was needed for extra spending in health, agriculture, transport, education, justice, environment, and storm damage.

Compared to previous years, cuts elsewhere were not being sought to offset these increased costs.

In addition, there was the deferral of water charges and the frontloading of capital injections in Irish Water while there was also a European Court of Justice pension ruling with a liability of about €100m.

They cautioned that the main uncertainties related to the evolution of goods exports, which could be affected by changes in foreign contracting by resident multinationals, and a slowdown in the eurozone.

“It also remains to be seen whether personal consumption levels catch up with the expectations derived from employment figures and high frequency indicators,” the report said.

Unemployment should not fall below 8% next year which will depress wage demands and, with low inflation, the competitiveness gained in the past few years should be preserved.

But the troika did administer a slap on the wrist to the Government over its failure to fulfil some of their demands, including putting a legally binding ceiling on spending.

They also noted that while the ending of the ‘double Irish’ tax arrangement would broaden the tax base, as was required, no other measures had been taken to increase the tax base.

They were less than enthusiastic about efforts to cut legal costs and the fact that lobbying pressures have delayed finalising the Legal Services Regulation Bill, and concede that multidisciplinary practices may not now go ahead as initially planned.

While reforms to further education and training were advancing as were key strands in healthcare, controls were needed to prevent health overspending without compromising service.

The Government is committed to cutting the budget deficit to below 3% of GDP as required, although the troika fears public service pay and pensions will threaten this target.

The report also contained an analysis of payment risks for the two EU funds that lent to Ireland — the European Financial Stability Mechanism (EFSM) and the European Financial Stability Facility (EFSF).

First repayments to the EFSF are not due until 2029 and to the EFSM are due to be delayed from the initial date of 2015 to 2027. The report concluded that risks remained low.

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