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Cutting €1bn in public pay will shave up to 0.5% off GDP - ESRI

Cutting public sector pay by €1bn will result in a reduction of 0.25% – 0.5% in GDP, according to the Economic and Social Research Institute.

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A REQUIRED FURTHER reduction of the public sector pay bill of €1 billion will result in a reduction of between 0.25 per cent and 0.5 per cent in Gross Domestic Product (GDP), the Minister for Public Expenditure and Reform has said.

Deputy Brendan Howlin said that in order for Ireland to meet its commitment to reduce general government deficit to under 3 per cent by 2015, a further reduction in the public sector pay bill was necessary.

Addressing a parliamentary question, Howlin said in order to meet the commitment, the Medium-Term Fiscal Statement (which commits to a €12.4 billion consolidation over 2012-2015) had indicated that €3.5 billion in savings and revenue-raising measures would have to be identified in 2013, €3.1 billion in 2014, and a further €2 billion in 2015.

“If the public service pay and pensions bill at 36 per cent of spending is to make a proportionate contribution to the necessary additional expenditure reduction currently identified as necessary for the next three years based on current economic forecasts, it will require a further reduction of some €1 billion in the cost of the pay and pensions bill”, he said.

The ESRI has suggested that that public service pay cut will result in a drop of economic activity of between a quarter and a half of a percentage point in the short-term.

“The exact impact  would, of course, depend on how the reduction was achieved,” Howlin said. “This impact on the economy must be balanced against the need to ensure that the fiscal deficit is reduced so that debt-to-GDP assumes a downward path from next year onwards.”

Read: Public sector pay cuts not ruled out, increments on the table – Taoiseach

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