THE ECONOMIC AND Social Research Institute is recommending the Government press ahead with its full of €3.1 billion package of taxes and spending cuts in the upcoming Budget. That’s despite both unions and business groups calling for the coalition to ease-off on the measures in recent weeks.
Making its twelfth medium-term outlook for the country, the think tank says the adjustment is the best course of action, however the economy fares in the next few years.
It sets out three scenarios for what could happen in the Irish economy before the end of the decade:
- Recovery scenario: The EU economy is assumed to return to a reasonable rate of growth over the rest of the decade. It is also assumed that the continuing problems in the Irish financial sector are tackled effectively. Under these circumstances, the economy could grow by around 3.5 per cent a year in the second half of the decade, more than halving the level of unemployment.
- Delayed Adjustment: This scenario considers what would happen if the EU economy recovered but domestic policy failed to resolve the ongoing problems in the Irish financial system, or if some other domestic event or policy delayed a recovery. Such a scenario could see the economy seriously underperform relative to its potential. This would mean that a prolonged phase of fiscal policy tightening would be necessary to stabilise the debt and the unemployment rate would remain in double digits for most of the decade.
- Stagnation: This scenario considers the circumstances where the EU economy does not return to growth in the near future. Under these circumstances the Irish economy, even if managed effectively, would struggle to grow at 1 per cent a year over the second half of the decade and the unemployment rate in 2020 would remain where it is today. In order to keep borrowing under control, continuing tough Budgets would be needed until the end of the decade.
According to the ESRI, the €3.1 billion adjustment would be necessary even if the recovery scenario proved correct, as failure to implement it would “still leave a need for some cuts at a later date”.
In the case of ‘stagnation’, it says: “the failure to make the adjustment in 2014 would leave a very big adjustment to be done in 2015 and 2016″. If the delayed adjustment scenario plays out, according to the think tank: failure to bring in the planned measures in October’s Budget “could both prejudice a potential recovery in the economy” and could also “result in increasing the debts of the state”.
The ESRI also warns that labour market policy must ensure there’s no repeat of the persistent long-term unemployment the country experienced in the in 1990s, and says that a recovery in output over the rest of the decade must be “reflected rapidly in a reduction in unemployment”.