 |
| DKM says these forecasts are a weighted average of the latest forecasts for the Irish economy from 15 independent sources. The economics consultancy expects downward revisions in coming weeks.
|
Irish Economy: The original Mac the Knife (in Act 1 Scene
7 of Macbeth: "If it were done when
'tis done, then 'twere well it were done quickly") pondered the benefits of
immediate action provided such action achieved the desired outcome, according to
Brendan Dowling, chairman of Irish economic consultants DKM.
In the October issue
of DKM's Economy
Watch, Dowling says a similar problem confronts the Minister for Finance
Brian Lenihan. Would a serious frontloading of the pain of fiscal adjustment
mean that the job was “done”? Or would it all come asunder as the
economy buckled under the strain?
On Tuesday last, Lenihan announced that a four-year fiscal
adjustment of tax rises and spending cuts of €15bn, was needed to meet the
target of reducing the annual budget deficit to 3% of GDP (gross domestic
product) by 2014. A year ago the expected adjustment in 2011-2014 was €7.5bn.
The Economic and Social Research Institute (ESRI)
had said last week
that an austerity programme of €15bn,
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 Government is assuming that annual average growth in the
period 2011-2014 will be 2.75% while Davy Research
said this week that
GNP (gross national product) will grow by 1.2% in 2011.
Brendan Dowling says the problem facing those who urge a more
moderate approach is that such advice is manna from heaven to politicians who
like nothing better than to put off till tomorrow any unpleasant measures which
do not have to happen today. A policy that might make sense in an ideal world
can look suspiciously like prevarication and a lack of political fortitude
especially to those who have to be convinced to lend money to the Irish
Government.
The economist says current forecasts for 2011 shown in the
October edition of Economy Watch - - a weighted
average of the latest forecasts for the Irish economy from 15 independent
sources - -
suggest a back-ending of the adjustment with the projected decline in the
borrowing requirement less than that required to reach the target of 3% of GDP
by 2014. He says a pro rata adjustment over the four years would require
the borrowing requirement to fall to around 9.75% of GDP. All the indications
from Merrion Street and Brussels suggest that the 2011 adjustment will be
front-loaded. If this were actually to be the case then a deficit of around 9%
of GDP would be indicated.
He says if the deficit was to be reduced on this scale in 2011,
the current projections for domestic demand look more than a little optimistic.
With construction activity almost non-existent relative to the boom years there
is little left to reduce in fixed investment spending. It is hard to see private
consumption recover in 2011 in the face of the likely increase in taxes and
reduced public spending. While the global economic outlook looks more promising
than it did several months ago, it is also hard to see the United Kingdom, our
closest trade partner with the largest impact on domestic activity, offering
much in the way of growth.
Brendan Dowling expects to see some downward revisions in the
2011 growth forecasts by the time of the next Economy Watch.
He says a front loading of the fiscal adjustment combined with a
clear path to the full adjustment might lead to a stabilisation of domestic
demand and the prospect of modest growth in future years as confidence grows. It
could also lead to significantly lower interest rates both for the Exchequer and
for banks seeking funding. What we cannot afford is a severe correction which
does not spell out in detail what will take place in 2012 to 2014. The
certainty of the axe with the uncertainty as to where it will fall is a recipe
for a dampening of the “animal spirits” of entrepreneurs so admired by
Keynes as the engine of growth. Without a clear path to recovery we will be
faced with stagnation.
SEE: Finfacts article;
Ireland Four Year Plan for Budgets: 1997; "For years we have been bled white
- now it's payback time" 2011-2014; The real payback time
Finfacts Budget 2011 Page
