herald

Saturday 21 October 2017

Don't hold your breath on tax cuts in the next Budget

Employers' body IBEC is calling on the Government to cut taxes in next October's budget.

The latest consumer confidence index from KBC Bank and the ESRI shows that consumer confidence rose slightly in June.

Figures compiled by RaboDirect show that 82pc of investors are now confident about the Irish economy - up from just 10pc four years ago.

Add to this good news on the economic front by way of a 26pc jump in new car sales recorded in the first six months of the year, a record number of people now employed in IDA-supported companies and the 2.7pc economic growth recorded by the CSO in the first quarter of 2014.

So the economic downturn's over and are the good times about to roll once again?

While I hate having to play the role of party-pooper, it might not be a good idea to get too carried away by an outbreak of renewed optimism.

Yes, there have been some relatively good economic indicators of late but we still need to be cautious.

The increased consumer confidence figures recorded in June came after the dreadful May figures and consumer confidence levels are still well below the levels recorded in April.

The fact that the combined market share of discounters Aldi and Lidl has now climbed to 16.3pc -almost one euro in every six spent at the grocery checkouts - shows that consumers remain extremely cautious and continue to insist on value for money.

By the same token, while the 62,000 new cars registered in the first half of 2014 may seem impressive, it was still less than half of the 138,000 registered in the first half of 2007.

statistics

There is also considerably less to the economic growth statistics than meets the eye.

The value of Irish economic output as measured by GDP, which includes repatriated multinational profits, grew at an annualised rate of 2.7pc in the first three months of the year.

But the value of economic output as measured by GNP, which excludes repatriated profits, grew by a scarcely detectable 0.5pc over the same period.

Most economists regard GNP as a far more accurate barometer of how the Irish economy is actually performing than GDP.

Almost six years after the 2008 bust, Irish GNP is at least 9pc less than it was in 2007.

In fact the CSO figures almost certainly under-state the true extent by which the Irish economy has shrunk since 2007.

This is because a large number of overseas firms have re-registered as "Irish" to take advantage of our 12.5pc corporate tax rate.

As these re-registered companies are officially classified as "Irish" their profits, which of course never see these shores, are included in the GNP total.

Economic think-tank ESRI reckons that this re-registration phenomenon could be artificially boosting Irish GNP by up to 5pc.

If this is in fact the case then the real reduction in Irish GNP since 2007 is closer to 14pc-15pc. That's not a recession but a depression.

Still it might not be a good idea to focus exclusively on the notion that the Irish economic glass is half-empty rather than half-full.

While things are still pretty grim there is little doubt but that they have at least stopped getting worse.

The most reliable indicator that a recovery of sorts is underway is the continuing increase in the number of people at work and the corresponding fall in the numbers signing on the Live Register.

The number of those with jobs rose by 42,000 to 1.88 million in the 12 months to the first quarter of 2014, while the total signing on has fallen by 35,000 over the past year.

dole

This increase in unemployment and shorter dole queues is the main driver of the improvement in the public finances, with tax receipts in the first half running €500m ahead of target.

So does the better-than-expected tax take mean that we can look forward to tax cuts from Minister Michael Noonan (left) next October?

While the need to placate an enraged electorate means that there will be some symbolic tax cuts, anyone expecting a Charlie McCreevy-style giveaway on October 14 is likely to end up seriously disappointed.

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