Nevin Institute says deep spending cuts not needed to reach 3% deficit goal

The Government can reach its target of reducing the State’s budget deficit to 3 per cent of GDP by 2015 without drastically cutting public spending, a trade union linked think-tank has said.

The Nevin Economic Research Institute said a combination of a stimulus programme, tax adjustments and savings from the recently restructured deal on promissory notes could be used to balance the State's books.

In its quarterly economic observer, the institute says such an approach would raise output and employment further and help accelerate the recent downward trend in unemployment, which has fallen from some 15 per cent to 13.7 per cent.

The institute said the "current trajectory of fiscal policy in the Republic of Ireland is impeding, unnecessarily, the path to economic recovery and employment growth".

The Government is obliged under its bailout agreements to cut the deficit by €3.1 billion in 2014 and €2 billion in 2015 to arrive at EU-mandated targets of a 5.1 per cent budget deficit in 2014 and a 3 per cent deficit in 2015. Savings arising from the promissory note deal could provide scope to reduce the total by €1 billion in each of the next two years.

The savings are likely to come from reduced spending rather than tax increases as Government members have said their aim is to ensure no increase in taxes.

To arrive at the 3 per cent goal, the institute recommends that households in the top 10 per cent income bracket should be targeted to secure an additional €1.65 billion of tax next year and a further €700 million in 2015. It also says the proceeds of the promissory note deal should be used to “reduce the fiscal consolidation by €1 billion in 2014 and again in 2015”.

The IMF last week said it would “not support reductions in the agreed scale of fiscal consolidation effort in 2014-15 on the basis of interest savings from the promissory note transaction” and that the savings should be used as a buffer against any economic shock.

The institute says the Government should also roll-out of a "fully commercial investment stimulus" of €1.5 billion and €3 billion in 2014 and 2015 respectively. The stimulus could be supported by funds drawn from public, private and European investment sources, which the institute says would not need to be added to the deficit under Eurostat policy.

The economic impact of such a move could lead to the creation of “25,000 jobs” and a spike in “GDP growth from 1.2 per cent to 2.7 per cent” next year, the report states. Extra taxes collected by increasing the number in work and savings from decreasing the number of unemployment benefit claimants would further reduce the need to lower public spending.

The institute said such an approach could help the State avoid further damage to the quality of its “fragile public service and income support”, avoid further increases in poverty, reinforce market confidence in Ireland and begin to address some of the key social and economic infrastructural short-comings in Ireland.