Irish Economy: The ESRI
(Economic and Social Research Institute), the publicly funded but independent
economics think-tank, today in its latest Quarterly Economic Commentary,
forecasts 2010 GDP (gross domestic product) growth at 0.25 per cent; GNP (gross
national product -- excluding profits of multinational sector) will contract 0.5 per cent and in 2011 GDP
is expected to grow by 2.75 per
cent, with GNP growing more slowly at 2.25 per cent. For 2011, the budget
deficit will fall to 10.25 per cent of GDP. The General Government
Balance, based on EU criteria will be €16.5bn and the expected Exchequer
shortfall is €19.9bn.
Employment in 2010 is forecast to be 72,000 lower
than in 2009, on an annual average basis - - a cumulative fall in
employment of 266,000 since 2007. Corresponding to this fall, the number
unemployed will average 286,000 in 2010. This implies that the unemployment rate
would average 13.25 per cent. For 2011, the rate will fall marginally to 13 per
cent. The ESRI has revised upwards its figures for net outward migration, to
70,000 in 2010 and 50,000 in 2011.
The General Government Deficit will be 11.5 per
cent of GDP in 2010. Including the cost of the bailout monies for Anglo Irish
Bank and Irish Nationwide, this figure would be 19.75 per cent. In 2011, the deficit will
fall to 10.5 per cent of GDP. This is based on the assumption that a full €3bn
package of austerity measures is implemented in the 2011 budget. By the end
of 2011 the gross government debt will be equivalent to 94 per cent of GDP,
compared to 44 per cent in 2008. Interest payments (excluding toxic property
loans agency NAMA), which will also increase due to the cost of the bank
bailout, will be close to €6bn, or 3.5 per cent of GDP in 2011.
The forecast of tax revenue for 2010 is for an
overall decline of 2 per cent. This is equivalent to a full-year tax take of
€32.5bn. Given that the current annualised number is below €32bn, this estimate
is based on a pick-up in revenue in the second half of this year as the economy
begins to recover. Tax revenue is forecast at €33.8bn in 2011 and spending
at €56.4bn. The expected Exchequer shortfall is €19.9bn (in the
total calculation, there are a number of other minor items). The General
Government Balance, based on EU criteria is €16.5bn.
In the year ending April 2010, total house
completions fell by 50 per cent, while registrations fell by 64 per cent. Data
for the first three months of this year show total commencements of 1,706. Based
on these latest indicators, the institute is forecasting total house completions
of 10,000 in 2010 and this implies a fall of 43.5 per cent in housing investment
this year. For 2011, it expects the number of house completions to stabilise at
10,000 units. While the contraction in house building will no longer act as a
drag on economic growth, this sector will not make any significant contribution
to growth in 2011.
The pace of decline of house prices is showing no
sign of slowing. In the first quarter of the year, house prices in Dublin
registered their largest quarter-on-quarter decline, equivalent to 10.3 per
cent, while house prices nationally fell by 4.8 per cent. At this time, house
prices in Dublin are 42 per cent below their peak, and nationally they were 34
per cent below peak. The institute expects the cumulative fall in the price of
new houses to be close to 50 per cent from the peak by the end of 2011.
Overall, world trade is projected to grow by 10.6
per cent in 2010 and 8.4 per cent in 2011. The ESRI says while this would
obviously be a positive development from an Irish perspective, it should be
noted that the acceleration of growth in trade is being driven by non-OECD
countries e.g Asia, with whom Ireland has relatively little trade.
Having performed solidly in 2010, despite the
slump in international trade, the ESRI expects the volume of merchandise exports
to expand by 5.25% in 2010 and 4.25% in 2011. Non-tourism services exports will
grow by 4.75 per cent in 2010 and 5 per cent in 2011 in volume terms.
For 2011 the ESRI has implemented a stylised
budget based on the pre-announced targets included in the Budget 2010
document. The document includes cuts of €3bn, with €2bn targeted at the current
side of the budget and a €1 billion reduction in capital expenditure. It assumed
an increase in €1bn in taxation, split between increases in income tax
(including PRSI) and some form of property taxation.
The institute estimates that such a budget
package would reduce the General Government Deficit by between 1.5 and 2
percentage points of GDP. The impact on the wider
economy is to reduce the growth rate by approximately one percentage point.
Some of the authors' -- Prof.
Alan Barrett, Dr. Ide Kearney, Jean Goggin and Thomas Conefrey - - main
findings of the analysis include the following:
For 2010, we expect GDP to grow
by ¼ percent in volume terms; the corresponding figure for GNP is for a fall
of ½ per cent.
For 2011, we expect GDP to grow
by 2¾ per cent and GNP to grow by 2¼ per cent. While this return to growth
is to be welcomed, it should be seen as a modest pace of growth.
One reason for describing the
2011 growth forecast as modest relates to our expectation that employment
will not grow between 2010 and 2011. Instead, we expect the number employed
to average close to 1.9 million in both 2010 and 2011.
In spite of the stability in the
numbers employed, we expect unemployment to fall between 2010 and 2011,
averaging 13¼ per cent in 2010 and 13 per cent in 2011. This expected fall
in the rate of unemployment is related in part to expected migratory
outflows – 70,000 in the year ending April 2010 and 50,000 in the year
ending April 2011.
We expect the General Government
Deficit to be 11½ per cent of GDP in 2010. Including the cost of the bailout
monies for Anglo Irish Bank and INBS, this figure would be 19¾ per cent. For
2011, we expect the deficit to fall to 10 per cent of GDP. This is based on
the assumption that a full €3bn package of austerity measures is implemented
in the 2011 budget.
In the General Assessment, we
discuss the government's plans for further fiscal austerity measures. Given
the vulnerability of the Irish economy to the vagaries of market sentiment
on our sovereign debt, we argue that it is imperative that the government
adhere to its programme of fiscal consolidation.
Within the confines of this
austerity programme, it is vital that whatever resources are available be
used strategically to help tackle the growing problem of unemployment. We
caution against the use of spending on infrastructure as a form of
employment creation as the cost per job created can be large. Making
longer-term investments in people through training and education programmes
could be a more effective way of combating unemployment.
spending from infrastructure to re-skilling and up-skilling people
The ESRI says while adherence to the programme of fiscal
adjustment is crucial, it is clear that this remains a huge challenge. As the
IMF recently noted, the possibility of “consolidation fatigue” exists,
whereby the general willingness on the part of the public to accept the fiscal
measures may diminish. In
this context, it says it would hope that the widespread political consensus that
existed prior to Budget 2010 on the broad fiscal parameters will remain.
One of the many lessons from the 1980s is that the absence of
political consensus made the task of dealing with the public finances
substantially more difficult relative to the situation when such consensus was
The institute says at a more micro-level, the
discussion in this Commentary on the growing problem of unemployment, and in
particular youth and long-term unemployment, prompts it to re-iterate points that
have been made previously on the need to manage active labour market polices in
the most efficient and effective ways possible. ESRI research in this area has
identified two strands to the management of active labour market programmes.0
One strand is concerned with how people should be
selected for participation on schemes, while the second strand is concerned with
“what works” once people have been selected.
The ESRI says a number of principles have emerged from this
work. With regard to selection, more highly educated people and people with
longer periods of previous labour market experience are more likely to move back
from unemployment to employment without intervention relative to other groups.
In a context of limited resources, this implies that resources should be focused
on those who are most likely to need interventions, such as younger and
With regard to the second strand of “what works”,
evidence accumulated during the 1990s suggests that the most effective
programmes were those that were linked closely to demand in the labour market.
In situations where individuals may not have had the levels of skills needed to
participate in the most effective programmes, the lesson from this research was
to provide progression routes through levels of training, and education where
needed. The institute says while there can be a trend towards a weakening of
benefit conditionality during a recession, enforcements of the requirements to
participate in training and employment programmes can yield benefits in the
The ESRI concludes: "It appears to us that public funds would be
better used in re-skilling and up-skilling people who are unemployed as opposed
to using spending on infrastructure as a form of employment creation. As argued
by Morgenroth (Irish
Public Capital Spending in a Recession), public capital projects should be
undertaken on the basis that they have a long-run return to the whole economy and not
because they create short-term employment. This is because of a
relatively high cost per job created via public investment.
It is clear that the labour market may well be the area where
the legacy effects of the recession are highest in terms of the human cost.
For this reason, enlightened policy in this area is critical."
However, this assumes that the
likes of State agency, FÁS, can provide
useful courses. It has a record of mismanagement and is not renowned
for the quality of its training.
Managing the Housing Market under EMU: Policy Issues
This paper (see link below) argues that within the Eurozone,
the best instrument available to governments to manage regional housing markets
is fiscal policy. For countries such as Ireland and Spain, this may entail a
shift in focus away from the Stability and Growth Pact target of not running a
deficit to the requirement to run large surpluses for a number of years where
there is a housing boom. In addition, more active use of taxation would manage
risks to the wider economy arising from housing market bubbles by specifically
targeting the housing sector.
It seems obvious but how realistic is it in the context of
the Irish governance system?