ESRI warns Budget cuts will lead to 'lost decade'
Published 21/10/2010 | 05:00
DRACONIAN cutbacks to reduce the national deficit will wreck the economy for a decade, a new report by the country's leading economic think-tank has warned.
The Economic and Social Research Institute (ESRI) said the country could face a "lost decade", with one-in-10 people jobless, if the Government tried to meet the European Commission's target of reducing the budget deficit to 3pc of GDP by 2014.
Instead, it called for the pain to be spread over a longer period of time, with the schedule demanded by Brussels extended by two years.
However, Finance Minister Brian Lenihan insisted last night he would not reverse the proposed Budget cuts and would stick with plans to meet the commission's targets.
In a speech to the Irish Bankers' Federation annual conference, he admitted the country was facing a "daunting" challenge but there was "no way round it".
After cross-party talks failed last night to produce any consensus on the necessary spending cuts and tax hikes, the leaders of the four main political parties all backed the four-year target to cut the deficit.
Taoiseach Brian Cowen met Fine Gael leader Enda Kenny, Labour Party leader Eamon Gilmore and Green leader John Gormley in Government Buildings for more than two hours.
Mr Cowen stressed the importance of the party leaders reaffirming their commitment to addressing the deficit in the public finances with a view to reducing it to 3pc of GDP by 2014.
In its quarterly report published today, the ESRI warns that attempts to reduce spending in line with current targets could cut growth and boost unemployment so quickly that spending cuts have no effect.
"We're very worried about this. It's close to a tipping point," ESRI economist Ide Kearney said. "It's not a doomsday scenario where the country goes bust and the IMF comes in. It is a lost decade."
The commission has ordered all EU members to cut spending and bring borrowing under 3pc of gross domestic product (GDP) by 2014.
Such a move would force the Government to suck up to €15bn from the economy over the next four years. But the ESRI insists this approach is "overly ambitious".
It calculated a two-year delay would mean the Government could meet the 3pc target by removing €13bn from the economy.
The ESRI said a Government decision to abandon the deficit targets could restore faith in Ireland's battered economy.
It argued that many outside observers, including some rating agencies which consult with the ESRI, do not believe the country will be able to reach the commission's stringent targets.
"There's nothing magical about 2014 -- it's an arbitrary date," ESRI economist Alan Barrett said.
Mr Barrett said sticking to the Government's existing targets almost certainly means the end of the Croke Park agreement, which guarantees no compulsory public-sector redundancies and no cuts in salaries.
The think-tank also predicted GDP will contract by 0.25pc this year, while gross national product (GNP) will shrink by 1.5pc, a worse performance than forecast three months ago.
It predicts the economy will grow by around 2pc next year, but at a slower rate than previously forecast. Unemployment will fall slightly to around 13.5pc, assuming government spending cuts of around €4bn.
The ESRI admitted it has not attempted to forecast what will happen to houses prices next year. Prices will have halved since the peak by the end of this year, when the average cost of a house will be €185,000.
Meanwhile, in the Dail yesterday, Mr Lenihan revealed that the annual cost of the controversial bank rescue will be between €1.3bn and €1.7bn.
The Finance Minister admitted the mammoth figure "regrettable" but he argued it was less than 10pc of the black hole that had opened up between State income and the cost of running the country.