The Economic and Social Research Institute (ESRI) has warned the Government against delaying the introduction of the residential zoned land tax.
In its latest quarterly commentary, the think tank said addressing land prices was “arguably” the only way policymakers could significantly reduce the cost of housing.
“Most other cost elements such as labour and materials are broadly speaking outside the control of Government,” it said.
The proposed 3 per cent tax, which is due to kick in next year, is set to be charged on land that is zoned for residential use in a bid to clampdown on land hoarding.
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However, it has met opposition most notably from farmers, who claim that in some cases they would be liable for the tax on land used for agricultural purposes.
“By addressing possible land hoarding, the price of land can be targeted, thereby potentially reducing a cost of production which, typically, accounts for approximately 15 to 20 per cent of the cost of a residential unit,” the ESRI said.
“Given the significant expenditure by the State on providing housing at present, it is imperative that policymakers explore all means of improving productivity when substantial amounts of public spending are involved,” it said.
On the wider economy, the ESRI said it would experience reduced but consistent growth in the medium term as households benefitted from real wage growth and further interest rate declines.
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While headline GDP (gross domestic product) is expected to contract by 0.4 per cent this year on the back of fluctuating multinational investment, modified domestic demand (MDD), a more accurate barometer of domestic conditions, was still projected to grow by 2.3 per cent in 2024 and a further 3.1 per cent in 2025.
The ESRI’s Kieran McQuinn warned that with the economy running at close to capacity, budgetary resources must be used to tackle infrastructural deficits “and issues that are impeding the overall productive capacity of the economy”.
“We also need to be disciplined in other areas of fiscal policy so as we don’t overheat the economy and don’t add to price pressures that are there,” he said.
“On the taxation side, we don’t see any great scope for substantial tax reforms because you’re essentially putting money into the economy,” Mr McQuinn said.
Next week’s budget is expected to be framed around a tax and spending package of €8.3 billion, which will include additional public spending of €6.9 billion and taxation measures amounting to €1.4 billion.
Most of the tax package will be used to widen tax bands and thresholds to essentially inflation-proof the budget for workers.
Mr McQuinn said the ESRI supported indexing as it was “merely keeping incomes at pace with inflation”. The key was to avoid putting additional money into the economy via tax cuts, he said.
“While the present robust nature of the Irish public finances enables key infrastructural issues to be addressed, it is essential that increased Government spending is conducted in a prudent and precise manner,” he said.
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