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Wednesday 7 December 2016

Mission Impossible if world economy fails to rebound

Will the budget cuts wipe out the economy? Could shrinking the deficit by €15bn shrink economic growth in the process, asks Roisin Burke

Published 07/11/2010 | 05:00

THE last Budget took €4bn out of the economy, and economic growth almost flatlined for 2010. But in spite of the further €6bn cut planned for Budget 2011, the Department of Finance expects the economy to grow by 1.75 per cent next year.

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Shrinking the deficit while making massive fiscal cuts, against a backdrop of low growth could be quite the tightrope act for whoever's in government. Do the growth hopes stack up? We asked the economists.

Megan Greene

Economist Intelligence Unit

"I think the Government is pretty optimistic and I don't share their view," she said of the four-year Budget outlook.

"I expect real GDP to fall by 1 per cent in 2010 and 0.8 per cent in 2011 but to grow by an average of 1.1 per cent in 2011-14. The Government is doing what it can -- but the announcement of these figures was never going to calm the markets."

Bill Blain

Matrix Corporate Capital

"The Government's plan itself is credible, but Ireland can't grow if the global economy remains in its current lethargic state. I'm afraid the latest US numbers all point to sub-normal growth. That doesn't help Ireland.

"Europe may recover sooner -- by which we mean Germany. However a stronger euro will not help Irish exports to the US. I suspect growth is going to be difficult, but let's not underestimate the strength of the old Celtic Tiger outside housing -- pharma, computing, etc.

"We've got the looming Budget vote coming up. International investors are hearing the stories about bank tellers being spat upon, student strikes, and now that independent members of the Government will vote down the budget to protect their own constituencies.

"Risking political tension and domestic strife show the Irish have an austerity breaking point. I'm not sure it's widely understood that the opposition is in as much of a quandary on what to do as the Government. Who would want to be in government now. If FG are smart, they'll vote FF!

"Increasingly Ireland is going to understand that aside from the disaster that is the housing crisis, Ireland is now in hock to the euro. How can it grow while in austerity? It can't. More strife is likely."

Blain cites the growth-inhibiting fear that is Bank Bailout: The Sequel. "We also have the train crash in motion that is AIB. It all smacks of further government bailout being required. That's very negative.

"I had a respected UK bank bond investor tell me he now considers AIB subordinated debt to be worth a fraction of its face value."

Marie Sherlock

SIPTU Economist

"I don't believe you can take €6bn out and not tip the economy into a prolonged slump, I don't believe it's possible," says Sherlock.

The Government's unemployment forecast of 0.25 per cent fall is extremely unlikely. Unemployment is likely to be far in excess of that.

"The knock-on effect will be zero growth in domestic consumption. I don't know how on this basis you can expect growth.

"Domestic consumption next year will be negative overall and GDP will be flat -- zero, or possibly less than zero," she predicts.

Relying on the relatively strong export market to get us through is a long shot. "The exports we depend on are increasingly narrowly concentrated on pharmaceuticals and chemicals. These sectors have gone from being worth 30 per cent of industrial output in 2008 to 50 per cent now.

"Though there needs to be savings in public expenditure and the tax base, there needs to be a credit guarantee scheme for companies who need working capital.

"There needs to be debt restructuring for companies that will never be able to recover from their debt burdens without support.

"We also need to find mechanisms where instead of saving, people would invest that money in companies.

"Job creation has to happen for growth to follow. "If workers don't have jobs we're all snookered. Investing in infrastructure development such as water treatment plants and broadband etc are key."

Alan Barrett

ESRI

"Can we achieve this kind of growth? I don't know. With the European Commission insisting we get the deficit down, we have no choice but to try to do this, but that doesn't mean it's going to work. Savings packages of €5bn/€6bn is where the Government had to go.

"But while bond holders are very insistent on getting the deficit down, they are also interested in growth.

"There's no doubt that the €6bn adjustment will put a severe dampener on growth. The question is will there be sufficient positives in other areas to offset it? Consumer confidence and spending has been flat for quite a while -- we need that to grow. But it's going to be hard for that to happen if people get hit by taxes or job losses.

The Budget cuts pain may only be beginning, Barrett speculates. "Although this has been billed as frontloading, are there going to be Budgets like this for years to come?" he asks. "Even if you believe that €15bn is the final figure, very tough budgets will follow in 2012, 2013 and 2014.

"Consumer confidence is vital to growth, but the question is if the public believes the Government figures. Everything has turned out to be far worse than initially stated on both the banking side and the fiscal side.

"Government growth figures don't strike me as being unreasonable, not beyond the realms of possibility."

Lynsey Clemenger

Ulster Bank Capital Markets

"The Government growth forecasts are broadly reasonable, but the key to this is the basis of this growth forecast, which is exports, as opposed to any recovery of domestic demand.

"This puts a higher degree of importance on global recovery, and we have seen the downside of depending on that, as it has been slower than expected.

"We would expect growth next year of around 2 per cent and 2-3 per cent ballpark average over 2011-2014.

"This is justified because domestic demand is forecast to be less weak than in 2010, and exports, the main driver of growth, are holding up well.

"The next deciding factor will be the detail behind the €6bn, how it is cut."

Sunday Independent

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