Irish economy

The immediate imperative must be to arrest the deterioration in the public finances and this can only be achieved by a combination of modest tax increases and significant cutbacks in public expenditure. Delaying this adjustment is not an option and would lead to eventual bankruptcy, according to Jim Power, chief economist, Friends First, speaking at the launch of the Friends First Quarterly Economic Outlook in Dublin today.

“It is just not possible to continue to add €495 million per week to the national debt. It is time that the so-called social partners and government got real about this fact,”continued Power.

According to the Friends First economist the Minister for Finance will have to consider some further tax increases, however he warned that moves to further increase the personal tax burden would be counter-productive and indeed have already proved counter-productive over the past year.

Tax increases which could be considered include:

• The introduction of a carbon tax which could raise more than €450 million
• An increase in indirect taxes on motor fuel, alcohol and tobacco which could be used to raise at least €450 million
• A further significant increase in the employee PRSI ceiling, and a cut in employer’s PRSI
• A broadening of the tax base to increase contributions from tax exiles and lower paid workers. It is nice, but it is just not sustainable to have 50% of workers paying no income tax at all.

However, Power insisted that the Government must tackle public spending as well as looking at increasing taxation: “The reality is that the public sector pay and social welfare bills account for 71 per cent of gross current expenditure, so it is inevitable that if spending is to be cut, these two areas will have to be addressed.”

Spending cuts which could be considered include:

• Some cut to child benefit costs – a basic cut of 20% would save the Exchequer €500 million per annum. Taxing these benefits would be fairer, but would be very difficult to engineer quickly enough.
• Public sector pay bill – a reduction in pay for higher earning public sector workers must be considered – this correction is already underway across the private sector.
• Cutting the social welfare bill by 5% would save €1 billion in government spending.

However Jim Power also recommends that the Government puts some revenue raising measures in place to re-ignite consumer spending in key sectors of the economy, these include;

• The introduction of a car scrappage scheme for cars over 10 years old
• A significant reduction in employer’s PRSI in order to bring down the cost of labour. This is imperative in the short term if the employment crisis is to have any chance of being arrested. In relation to the Irish property market, Mr. Power is not predicting a recovery before 2011.

“Against a background of excess supply and constrained demand, it appears likely that house prices will fall further over the coming year. It is difficult to measure price changes in an illiquid market but a further decline of up to 15% appears likely, before the market is likely to bottom out in the second half of 2010.”

In relation to the global economy, Power said recovery is well underway and while recovery will be a gradual process, it is clear that most major economies have turned the corner. For Ireland this is unambiguously positive, but is not enough.

“The Irish economy is currently struggling in the face of a very adverse exchange rate environment, which looks set to continue. However, the Eurozone recovery will likely hit the Irish economy with the added burden of higher interest rates later in 2010 and into 2011. It is likely that ECB interest rates will start to rise at a totally inappropriate time for the Irish economy. However, being part of a monetary union means that there is nothing we can directly do to change this, but there are indirect measures. Specifically, we need to get the overall cost base of the economy down sharply on all fronts, and we need to invest heavily in education and training and broadband infrastructure.”

David Rosenberg, chief economist and strategist at Gluskin Sheff, and Thomas Lee, chief US equity strategist at JPMorgan, share their outlooks on the markets and the economy: