Gabriel Makhlouf suggests tax cuts to prevent economic overheating and inflation.
Gabriel Makhlouf, in his letter as part of the annual budget-making process, advises the government to consider tax cuts instead of tax hikes. He emphasizes the need to reduce demand and supports using the funds for investments in areas like housing, climate infrastructure, and pensions. Makhlouf highlights that higher prices have already impacted spending under the National Development Plan.
According to Makhlouf, the economy is at risk of overheating as it is already at full employment. He cautions against further stimulating demand through fiscal policy, stating that choices should be made to protect against inflation and overheating dynamics that could negatively impact households and businesses.
Makhlouf’s letter is supported by Central Bank analysis, which predicts that higher wages and increased consumer spending will lead to domestic growth and underlying inflation this year. This message of caution comes in the context of the upcoming budget and challenges Fine Gael’s plans for lower taxes on middle-income earners.
The Central Bank’s revised forecast for domestic growth in 2023 is 3.7%, with a projected decrease in inflation to 5.3% from nearly 8% last year. However, underlying inflation, excluding food and energy prices, is expected to continue rising due to increasing wages.
To maintain competitiveness, Makhlouf suggests that Ireland should learn from its eurozone neighbors and manage inflation effectively. The European Central Bank has already raised rates due to inflation concerns, and Makhlouf warns that fiscal policy should not stimulate demand further at a time when the ECB is trying to restore price stability in the euro area.
Makhlouf concludes by stating that the government should not exceed its 5% limit on net spending increase, as it did during the pandemic. If the risks of overheating become more significant, a tighter fiscal stance may be necessary in the coming years.
Given Ireland’s already high cost of living, Makhlouf’s suggestions aim to strike a balance between economic growth and ensuring sustainable living standards.
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