Central Bank warns cuts and tax hikes will stall economic recovery
Published 01/02/2011 | 05:00
THE Central Bank dashed hopes for significant economic growth this year, as it warned that tax hikes and spending cuts will cause the economy to remain flat.
The bank slashed its growth projections yesterday in its first official response to Finance Minister Brian Lenihan's Budget, which aims to take €6bn out of the economy.
Just three months ago, the bank predicted the economy would grow 2.4pc this year. Now it says growth will come in at just 1pc.
While it is common for forecasters to tweak their predictions, it is unusual for the Central Bank to more than halve growth forecasts in just three months.
The economy looks even worse when measured by the Government's own preferred measure of growth, which excludes the contribution from multinationals.
Under this measurement -- gross national product -- the economy will shrink this by 0.3pc -- the fourth year in a row the country's total output will have fallen.
"The prospects for the Irish economy for this year and next have deteriorated in recent months," the Central Bank said.
"Domestic demand will weigh more heavily on growth this year and next than was anticipated."
As the economy staggers under the weight of the banking crisis, as well as excessive Government spending and interest payments that gobble up 15pc of all our taxes, the Central Bank warned that economic growth could be even worse than yesterday's forecasts.
"While this is the bank's central scenario, a range of both stronger and weaker outcomes are, of course, quite plausible," it warned.
Low growth might force the incoming government to make new and unpopular cuts on top of those already announced when the present administration introduced its four-year plan to take €15bn out of the economy.
The IMF and EU -- the organisations behind the country's €85bn bailout -- have said repeatedly that more cuts might be necessary and have disagreed publicly with the Government's growth forecasts, which are much higher than the Central Bank's revised figures.
Yesterday's report is more pessimistic than other forecasters about unemployment, predicting that the jobless will average 13.7pc this year.
Wages are also expected to fall slightly for the third year running -- something that will help push down consumer spending by 2.2pc, an even bigger drop than the 1.7pc slump last year. Inflation will rise as healthcare companies such as the VHI and Aviva raise charges and higher energy costs bite.
The bank, nevertheless, gave a broad thumbs-up to the Government's economic policies of taxing more people and cutting spending and urged more of the same medicine. "The overall aim now must be to continue moving to a situation in which reasonable tax rates are applied to a broader stable base with revenue close to matching expenditure, the position that obtains in most countries over time," it said.
Exports, long seen as the one bright light for the economy, are expected to grow but at a slower rate than in 2010, despite a growing world economy.
Another bright spot, the gradual restoration of competitiveness, still requires a lot of work, however, as much of the gain has been illusory.
The fall in labour costs has been mostly limited to some sectors, such as construction, and must now spread to services such as legal, medical and waste collection, which have so far been exempt from price pressures because there is little competition. The International Monetary Fund has already demanded the Government scrap rules that protect these sectors by not recognising some foreign degrees, for example.
"The aim must be to get back to the situation that prevailed at the beginning of the last decade, just after entry into EMU," the bank said.
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