To begin, I would again stress that, given the current fiscal position of the State, there is no real scope for a large-scale revenue stimulus on the scale proposed by the Deputy. When assessing the potential impact on the economy of such a measure, my Department must weigh the short-term benefits of economic output against the impact on the public finances. In this regard research produced by the ESRI as part of its Medium-Term Review of July 2013 (pg. 117-118) is informative. Using the HERMES macroeconomic model, the ESRI tested the economic impact of a series of fiscal shocks to the economy. It includes simulations of the impact of a €1 billion adjustment in income tax, which is economically similar to the USC. The results of the research suggest an income tax multiplier of -0.6, that is, a €1 billion reduction in income tax results in additional GDP of about €600 million over the forecast horizon. Employment would be impacted positively by about 0.5 per cent.
The relatively low GDP multiplier likely reflects the open nature of Ireland’s economy and the fact that increased demand would ‘leak out’ through imports. The simulations also include the assumption that some part of a reduced tax burden would be saved rather than spent by households. This positive impact on output must be balanced against the impact on the public finances exerted through lower tax revenues. The simulations suggest that the deficit would increase by 0.5 percentage points of GDP and general government debt by just over 2 per cent of GDP, both by the end of the forecast horizon.
Given Ireland’s current fiscal position, we must necessarily ask if such a measure would be prudent and whether it could be sustained over the medium-term. Through the fiscal adjustment measures that the Government has implemented, stability has been restored to the public finances, the economy is growing and data from the second quarter of the year show jobs being created in the last four quarters. Irish sovereign yields are now at about 3½ per cent, a fraction of the highs of over 14 per cent reached in summer 2011. The improvement in yields is due in large part to the Government’s fiscal strategy which has seen consistent deficit reduction. A reduced cost of borrowing for the Government reduces the interest bill which has to be paid by the taxpayer.
