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Ireland economist forecast report – November 2020
Economist commentary on GDP, the budget and global tax laws
2020 has been a bumpy year for the Irish economy. As we head into the twilight months of the year Finder spoke to seven economists about the economic outlook, recent budget announcement and potential changes to the taxation of digital companies. Not every panellist responded to every question.
Who are our panellists?
|Ronan Dunphy||Investec Europe||Economist|
|Dermot O’Leary||Goodbody||Chief economist|
|Edward Shinnick||University College Cork||Professor|
|Daniel McLaughlin||Dan McLaughlin Economics||Founder|
|Sean O’Malley||N/A||Independent economic consultant|
|Jim Power||Jim Power Economics||Chief economist|
|Brian M. Lucey||Trinity College Dublin||Professor of finance|
Ireland’s economic outlook
Earlier this quarter the Irish Central Bank forecast a contraction of about 0.4% this year. However, Finder’s panel has a much more bearish outlook – on average they think the economy will contract by 1%. Two panellists think the economy will contract by around 1.5% and just one panellist, Investec Europe economist, Ronan Dunphy, thinks it will contract by more than 3%.
Panellists agree the economy will experience positive GDP growth next year but they are divided as to whether this would happen in the first or second half. Four panellists (57%) said the first half of 2021 and three the second half (43%).
However, further shutdowns will hinder Ireland’s economic recovery and could send the unemployment rate skyrocketing. If Ireland was to undergo another Level 5 restriction for a two-month period the unemployment rate could reach 28%, according to chief economist Jim Power.
The panel average was more conservative but still shockingly high at 19%, meaning one in five people would find themselves unemployed. Along with Power and Dunphy, Goodbody chief economist, Dermot O’Leary and independent economist, Sean O’Malley also said the unemployment rate would go over 20%.
To aid Ireland’s economic recovery the government announced a nearly €18 billion budget. But is it big enough? According to five panellists (71%), including Dunphy, the answer is yes.
“Capital spending could have been increased further. Now is the time to invest in capital projects that will improve the productive capacity of the economy, address areas of underinvestment and assist in the recovery,” he said.
O’Malley agreed, noting the General Government Balance is “… in-line with that of the European average, meaning the Government here is (rightly) doing as much as it can without becoming an outlier from a markets perspective.”
Just one panellist, University of Cork professor, Edward Shinnick said the budget spend should have been lower and one panellist, Trinity College Dublin professor of finance Brian M Lucey said it should have been higher given Ireland needs “massive investment in housing and green infrastructure”.
Spend aside the majority of the panel were satisfied with the budget. Five panellists (71%) said they were somewhat or very satisfied, with just one panellist dissatisfied and one neutral. When asked if this budget should have had more tax O’Leary was the only panellist to say yes because he thinks reform of the Capital Gains Tax Regime would spur investment.
Specific budget measures
We asked our panel whether they thought the new hospitality scheme subsidy announced in the budget would be sufficient to keep previously viable businesses afloat. Three panellists (43%) don’t think the scheme will be sufficient, saying that only some businesses will be able to survive. On the other end of the spectrum, four (57%) said it was sufficient and that most but not all will survive.
While the Christmas budget handout is a nice bit of extra cash for many people it won’t do anything to stimulate the economy according to the panel. Five of the six panellists answered the question saying “no, not really”, with one saying “no, not at all”.
The panel was also unanimous when asked about two other measures – the social welfare adjustments and the housing measures. All six panellists who answered the question said the welfare adjustments were “about right” and all six said the housing measures won’t be effective in making housing affordable.
Shinnick said that in order for housing to become affordable “they need to address the supply issues”. As far as Power is concerned the “delivery of plans [is] key but [their] track record is not good in that regard”. He also noted that “developer capacity is an issue”.
International tax rules for digital companies
For this report, we asked our panel if they think international tax rules for digital companies like Facebook, Google and Amazon should be updated to prevent companies booking profits in low-tax countries like Ireland, regardless of where their customers are. The majority of the panel (five of six panellists or 83%) said the tax laws should be updated while just one panellist, Daniel McLaughlin, said no.
In the absence of a new international rulebook, a growing number of governments are planning their own digital services taxes, which has prompted threats of trade retaliation from the Trump administration. The good news is that most panellists think a trade war is unlikely.
Power thinks it’s somewhat likely a trade war will eventuate.
“It [the Trump administration] will call out Ireland on its tax policies. Ireland will be forced to focus on other factors that make it attractive for FDI.”
McLaughlin said it was unlikely but would depend on the US and the likely Biden administration. O’Malley also thinks it unlikely:
International tax reform will undoubtedly be a net negative from an Irish corporate tax receipts perspective. The country is dangerously reliant on this form of taxation – currently accounting for roughly one in every five euros of tax revenue collected. While reform momentum has slowed in recent months, potentially buying Ireland some additional time, it’s imperative that the tax base here widens to offset any future shortfalls from this source.
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