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News : Irish Economy Last Updated: Oct 22, 2010 - 7:09:02 AM

Irish Economy: ESRI says €15bn savings required for deficit target of 3% by 2014; Preferable to extend deadline to 2016
By Michael Hennigan, Founder and Editor of Finfacts
Oct 21, 2010 - 6:06:33 AM

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Irish Economy: The ESRI (Economic and Social Research Institute) says today that using its low growth scenario for Ireland's economy that was published by the Institute last July, to achieve a deficit of 3% of GDP (gross domestic product) by 2014, savings of up to €15bn would be required  -- double the sum agreed when Ireland and the European Commission settled on 2014. The Institute says in its Quarterly Economic Commentary, Autumn 2010, that it would be preferable to extend the deadline to 2016.

A spokesperson for EU economics commissioner Olli Rehn is reported as saying last night that only the European Council  -- comprising the heads of state and government - - could change the 2014 target confirmed recently by the Government.

The Institute says the Government must soon announce its four-year programme of fiscal austerity and the Commission is more likely to use a growth profile closer to the ESRI low growth scenario when assessing Ireland’s fiscal requirements. 

The economists say an austerity programme of this magnitude, confined to a four year period, will clearly have severe implications for economic growth. The low growth scenario that was presented in the Institute’s Recovery Scenarios paper envisaged an annual average growth rate of 3¼% per annum out to 2014. The calculations suggest that this growth rate would be reduced to 2¼% as a result of this much larger adjustment package compared to the original package of €7.5bn announced in the 2010 Budget

The economists express "grave doubts over the wisdom of the parameters of an austerity programme where such a high levels of savings will be sought in such a tight timeframe. A restoration of sustainability in the public finances is needed, of that there is no doubt. But to us, if one accepts the ESRI’s low growth scenario as being a reasonable depiction of how the Irish economy might grow in the coming years, a longer timeframe for adjustment would be preferable. The problem arises because an austerity package of €15bn within four years could damage the potential of the economy to grow its way out of recession.The scale and speed of adjustment is such that it will be exceptionally challenging to retain societal support.  From our perspective, an agreement with the European Commission to reduce the deficit to 3% by 2016 would have been preferable and would have been seen as being credible by international lenders, once EU agreement had been achieved."

Today's QEC says while the 2014 date is worryingly ambitious, the Institute is mindful that an extension is highly unlikely and so we must operate within the constraints as presented. Although the economists have based their forecasts on a budgetary package of €4bn of savings in 2011, it could well be that a higher amount will be sought. Whatever it is, the scale of the task is such that there will be a need for adjustments in current and capital spending and in taxation.

The ESRI says the An Bord Snip Nua, remains the most comprehensive overview of what might be done. Given the scale of what we now face, it may be necessary to explore whether or not the scope of that exercise is adequate to the current situation. The Institute warns that it is important to recognise that the quality of the decisions we make in relation to the cuts will have a bearing on the rate of our long-term recovery. 

However, the economists warn that as so many of the savings outlined in the Bord Snip report relied on shrinking numbers in the public sector, they are forced to raise the question of whether the Croke Park deal on public service reform may need to be revisited and, in particular, if mandatory redundancies in the public sector might have to form part of the adjustments. They add that the agreement that there would be no further cuts in pay in the public sector is the other element of the Croke Park deal which, might now also have to be re-opened.

On taxation, the ESRI says the report of the Commission on Taxation provides an analysis of many relevant issues. Options such as the introduction of property tax and the application of water charges are simple elements in any rational tax system. Even in the absence of a fiscal crisis, they should be introduced but the current imperative is overwhelming. The broadening of the tax base, especially by reducing extent of tax expenditures that grew in the past decade, also provides an opportunity both to improve the operation of the tax system and to raise necessary revenue.

The Institute concludes: "While we are deeply concerned about the austerity road which Ireland will have to pursue in the coming years, it seems that we have little room for manoeuvre as a result of the policies that were pursued in the early and middle parts of the last decade. The weak system of banking regulation and the growth in public spending which relied on transient sources of revenue contributed to bringing Ireland to this point. It is to be hoped that there will be beneficial dimensions to the austerity programme but the challenges are immense."

Quarterly Economic Commentary, Autumn 2010

Prof. Alan Barrett, Dr Ide Kearney, Thomas Conefrey and Cormac O'Sullivan (ESRI)

Some of the main findings of the analysis as summarised by the ESRI include the following:

  • We expect that GNP will contract by 1½% this year. For GDP, we expect a decline of ¼%. For 2011, we expect GNP to grow by 2% and for GDP to grow by 2¼%.

  • We expect that employment will average 1.86 m this year, down 68,000 from 2009, a fall of 3½%. We expect the rate of unemployment to average 13¼%. For 2011, we expect the number employed to average 1.85 m and the rate of unemployment to average 13½%.

  • In the year ending April 2010, the CSO recorded net outward migration to have been 34,500. This was well below our forecast of 70,000. We discuss how this figure of 34,500 seems to be a conservative estimate of the rate of outflow when compared with estimates of migration contained in another CSO publication, namely, the Quarterly National Household Survey. We expect the net outflow in the year ending April 2011 to be 60,000. This is an increase of 10,000 on our earlier forecast for the year ending April 2011.

  • The General Government Deficit is expected to be 31% of GDP this year, a truly dramatic figure. Of course, almost two-thirds of this is a one-off extraordinary item related to the banking bailout. For 2011, we expect the deficit to be 10% of GDP, based on a budgetary package of €4 billion in savings.

  • In our General Assessment, we look at the budgetary challenges facing the country and in particular at the prospects of bringing the deficit down to sustainable levels in a reasonable timeframe. Using the “Low Growth” profile as published by the ESRI in July 2010, we assess what level of savings will be required to achieve a deficit of 3% by 2014. Our calculations suggest that savings of up to €15 billion could be needed, i.e., twice the sum that was under discussion at the time Ireland and the Commission agreed to the 2014 deadline.

  • We express a concern over the potential negative impact on the economy of this scale of adjustment over this period of time. While the 2014 date strikes us as worryingly ambitious, we are mindful that an extension is highly unlikely and so we must operate within the constraints as presented. Although we have based our forecasts on a budgetary package of €4 billion of savings, it could well be that a higher amount will be sought. Whatever it is, the scale of the task is such that there will be a need for adjustments in current and capital spending and in taxation.

Executive Summary

This Quarterly Economic Commentary includes the following Research Bulletin articles:

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