THE Government may have difficulty meeting its spending targets this year, posing a bigger threat to the quality of public services, the Economic and Social Research Institute says in its latest quarterly bulleting.
The ESRI has reduced its growth forecasts for 2013 – mainly because of weakness in the international economy. The revenue targets may still be met, but pay costs, especially in the health sector, will keep the public finances under pressure.
"Without adjustment in the public sector, it is difficult to see how the expenditure targets can be met without a major cost in terms of service reduction," the report warns.
"Where payroll costs are managed through delaying procedures for non-life threatening illness, the consequences are borne by those requiring treatment," it claims.
The ESRI body has also heaped pressure on both the Government and public sector unions to produce significant gains through the renegotiation of Croke Park, saying savings are essential to give Ireland a chance of coming out of bailout next year.
"The underlying position is difficult so that the realisation of sustainable gains depends heavily on the successful completion of the current Croke Park negotiations. If these are successful then, while the position this year may not be ideal, the stage will be set for realising the 2014 targets."
The ESRI has revised downwards its predictions for GDP this year from 2.1pc in its autumn commentary to 1.3pc. This is broadly in line with revisions by both the Central Bank and the European Commission.
"Our view of the prospects for the Irish economy in 2013 and 2014 is heavily influenced by the continued failure to deal with the international crisis. A fundamental shift in fiscal policy at the eurozone level is needed to return the monetary union to stable growth," it says.
Unemployment is expected to fall slightly over the next two years, but this is predicted to be due primarily to emigration rather than an increase in jobs.
David Duffy, ESRI research officer and author of the latest Quarterly Economic Commentary, said the economy is growing, but growth would be weak.
"There had been some hope that the euro area would show moderate growth in 2013 but really the consensus seems to be now that there'll be a marginal contraction."
Key findings from the commentary include:
Unemployment will fall from 14.9pc last year to 14.6pc this year and 14.3pc next year, largely due to emigration.
Construction will rebound this year for the first time since the crash, with an increase of 3.1pc after sharp falls last year.
Total investment is expected to increase by 3.1pc. This is more optimistic than the Central Bank report this week, which has investment rising by 0.6pc, with construction to contract by 2.9pc, but the ESRI thinks investment was lower last year.
Both have similar forecasts for growth because the ESRI expects imports, mainly services, to increase by 4pc, which reduces total domestic output.
Budget 2013 was less progressive than the other austerity budgets, but the whole process has been less damaging to lower-income groups.
The end of the interest holiday on the Anglo Irish promissory notes will add substantially to national debt interest, unless there is a last-minute deal.
Mr Duffy said they saw the housing market remaining weak with some construction activity driven by foreign direct investment. "We think the contraction will be less than had previously been the case, but it is in a very weak market and off a very low base, so small movements do impact," he said.
Mr Duffy said that if the Government did not secure a deal on easing the terms of the Anglo Irish promissory notes or secure a deal on the wider banking debt, it would hit confidence.
That would impact on spending by businesses which would feed through into the economy.
Joseph Durkan, ESRI associate research professor, said they were confident that Ireland could exit its bailout this year.