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Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM


Irish Economy: Economist proposes 10-point plan that is a menu without prices
By Michael Hennigan, Founder and Editor of Finfacts
Sep 12, 2008 - 7:06:52 AM

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Irish Economy: Bloxham Stockbrokers economist Alan McQuaid issued a report on Thursday in which he projected that the economy will contract by 2.5% in 2008 and proposed a 10-point plan to reignite economic activity. However, as the Government scrambles to find areas of public spending to cut, McQuaid's plan has no costings and is in effect a menu without prices.

"The bottom line is that Ireland is facing into very difficult times over the next twelve months or so, but if the right fiscal response is put in place now, the length of the downturn can be shortened significantly," McQuaid said.

The majority of Irish economists stick to a 12-month time horizon as the medium or long-term may necessitate making proposals that would impinge on vested interests, to be credible.

The impact of the US $150 billion tax rebate stimulus package ended in June and real consumer spending fell in July as underlying economic factors remained unchanged.

In Ireland's case, while the Government will budget to exceed the Eurozone's 3% annual deficit limit, in 2009, it's non-wage spending cuts will hit the private service sector, in particular. Pay freezes across the economy and fear of unemployment will hit consumer spending.

The exchequer contribution to the National Pension Reserve Fund was due to be over €1.7 billion next year and is expected to be suspended. In addition, it would not be a good time to liquidate part of the fund of €20 billion.

So now, after all the windfalls from the property boom, the Government has nothing available for the rainy day.

While short-term band aid measures can have an impact on some economic sectors, shortenings the length of the downturn significantly, is beyond its control, even if it had billions available for tax cuts and support of the housing sector.

While falling commodity prices, interest rates and an easing in the credit crisis, are realistic expectations for 2010 with the beginning of a global recovery, it would be a serious mistake to believe that the scenario of the ESRI's Medium Term Economic Review, would inevitably kick-in. McQuaid for example forecasts GDP growth of 4% in 2010.

This is of course likely to be the tack also taken by the Government and those economists who like artists, produce works favoured by their patrons, will inevitably chime in support.

This week, ECB President Jean-Claude Trichet said that a return to normal at the end of the credit crunch is unlikely to replicate the period to July 2007, while US investment bank Morgan Stanley forecast a period of relatively flat growth or stagnation in the G7 developed economies for some years to come.

So in the context of reform - if it's serious about it - and the fact that a medium term horizon is necessary in response to the slump - the Government should set out a multi-year fiscal framework that eschews unrealistic forecasts.

As to the housing market, both the Chief Executives of  Irish Life & Permanent - Denis Casey and AIB - Eugene Sheehy, have said that a public bailout of the housing sector is not necessary.

However, what is required to inform public policy, is a better collective picture of the situation.

Big contractors are now competing for business that they would have never done, just a year ago while in a market environment that is realistically expected for the coming two years at least, any one of them with loans of €100 million or a multiple, have to fund  €7 million or a multiple in interest annually, while underlying assets, revenues and margins, are falling.

The estate agency body, the IAVI, said last January that there were 40,000 empty apartments in Dublin while the Census 2006 showed that the number of empty units in the State had risen by 122,000 in the period 2002-2006.

What are the implications of this overhang?

Many buy-to-let properties were funded on a 5-year interest only basis but now in the downmarket, properties that were bought to make a quick profit, now require capital repayments.

 Alan McQuaid's Proposals:

1. Boost consumer confidence through increasing disposable income (e.g. cut income taxes).

2. Restore confidence in the housing market (e.g. cut stamp duty further).

3. Remove the logjam in the banking system (ensure borrowers who want a loan can get a loan, particularly for house purchase).

4. Privatise remaining State-owned companies.

5. Reform public service (a freeze on public sector wage bill a must).

6. Offer tax relief for hard-pressed exporters.

7. Ensure the National Development Plan is delivered on.

8. Reduce VAT on energy bills (would offset pain for consumers of recent sharp rise in electricity and gas bills).

9. Make sure that price reductions are passed on to consumers (this particularly relates to imported UK goods and sterling weakness versus the euro).

10. Maintain low corporate tax regime and Ireland’s high standard of education (essential for trying to attract foreign direct investment to Ireland).

McQuaid said in September 2007:" The global credit crunch has raised fears of a serious US/world economic slowdown, but I believe these worries are overdone as the rest of the world is now better placed to cope with a fall-off in US growth. I'm sick to death of people writing off the Irish economy and next year could easily see the "Celtic Tiger" roaring more loudly than many pessimists think."

It's regrettable surely, that more attention wasn't given to those who were dismissed as "people writing off the Irish economy" when most of them were rightly highlighting, that the boom was built on quicksand.

See: Analysis: Irish Economy - Cowen and the 100 days' milestone - a Political Pygmy amongst the Oireachtas Lilliputians

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