Ireland will continue to hit EU deficit targets

Ireland will continue its impeccable record of hitting its EU deficit targets this year and next – provided tax receipts make up for the cost of Irish Water if it has to be counted in the national budget.

The other unknowable as far as the European Commission’s economic forecast was concerned is the contribution to Ireland’s growth of contract manufacturing, much of it composed of US companies becoming Irish.

For the first time since the start of the crisis all EU countries will grow this year but while the signs are good, nothing can be taken for granted as risks remain and uncertainty has increased, Economics Commissioner Pierre Moscovici warned, as prospects vary greatly between countries.

“Europe is at a critical juncture” he said but the weak euro, the fall in oil prices, the ECB’s quantitive easing are helping, as is the EU’s investment plan.

Ireland will have the fastest GDP growth in the EU next year at 3.5% – slower than the 4.8% expected for 2014 – and will have reduced its deficit at a faster annual rate than any other country over the two years, according to the winter forecast.

But the Commission say they would prefer if the government had taken their advice and off set extra health and other spending using the unexpected increase in revenue, to to cut the deficit by more than the 4% they expect it will be for 2014.

As a result, they say, the deficit this year will be 2.9% – just meeting the 3% target with little room to spare. The government expects it to be 2.5% and the ESRI 2.4%.

The Commission accepts that if Eurostat decides in April that Irish Water must be counted in the national accounts, it will add around 0.4 percentage points to the deficit, bringing it to 3.3%.

They are waiting to see if tax revenues continues its increase over the next few months, and then, a Commission source said, this could offset the cost of Irish Water.

They are perplexed by the contribution to the national accounts of US companies becoming Irish – so called tax inversions. They note that the ESRI did some work on this recently and acknowledged that they were unable to eliminate the effect from their figures, even using GNP rather than GDP as their basis for growth.

It turns up as ‘contract manufacturing’ where these newly Irish-owned companies contract the manufacture of goods abroad and export them to a third country without coming to Ireland so that no employment is created or tax paid.

“We are looking into this to try to see what is the real value to the economy. We need to see some of the royalties that come to Ireland, to try to judge what is the exact benefit, whether it is just statistical or whether it really improves the economic situation. There is still some doubt on how much we can count on it”, he said.

The ESRI quarterly report in December estimated that these tax inversions boosted GNP in 2010 by 2.9%.

The Commission said Ireland’s growth was due to buoyant tax returns and exports, helped by a weak euro which will continue to work in Ireland’s favour especially with a high percentage of exports to non euro areas such as the US and the UK.

Ireland will be one of just five countries that will continue to run a current account surplus together with Italy and Germany, but the Irish increase will be smaller than in 2014 at 4.6% of GDP and will drop to 3.9% in 2015.

A pic-up in Irish domestic consumption is expected helped by rising wages and the drop in energy prices.

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