News Analysis

Thursday 18 September 2014

Colm Kelpie: We're nearly out of the woods – but not quite

Published 11/04/2014 | 02:30

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John Fitzgerald, Economic and Social Research Institute
John Fitzgerald, Economic and Social Research Institute

ARE we out of the woods? Not quite, but the Economic and Social Research Institute (ESRI) believes we're much further forward than anticipated.

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The Government had planned one more austerity Budget with about €2bn set to be raised through painful tax hikes and spending cuts.

The ESRI is now saying there's a chance that the measures that have already been taken, combined with the pace of the recovery, could lead to crucial deficit targets being met without the need for any new cuts.

That's just as well because it's hard to see at this juncture where the axe could fall again.

It might be a smaller adjustment than in previous years, but when your wallet's been emptied and the piggy bank raided, you want to hold on to every cent.

Finance Minister Michael Noonan has been flirting with the idea of a tax cut but the ESRI boffins don't seem enthusiastic.

That's because the path is potentially fraught with obstacles. On the one hand, the ESRI lauds the recovery as being vigorous and claims the public finances are improving more rapidly than anticipated. On the other hand, it reminds us it remains fragile, with considerable uncertainly about the strength of the recovery elsewhere in Europe.

And one of the big risks is the period of low inflation that the country – and the rest of Europe – is facing. Low inflation means prices are barely rising, and that could lead to the threat of deflation, or a period of falling prices.

ECB boss Mario Draghi has warned Europe is facing a long period of low inflation, and he's coming under pressure to take action. The ESRI's John FitzGerald said a bit of inflation "greases the wheels", while ICTU's boss said the spectre of deflation could spell disaster for Ireland.

Whether it's potentially damaging enough to derail the ESRI's prediction of a much softer Budget remains to be seen.

Irish Independent

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