Brendan Keenan: Pressure grows for a tougher Budget
Bank claims Lenihan's forecasts too optimistic
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Saturday July 31 2010
FINANCE Minister Brian Lenihan is under pressure to produce an even tougher Budget in December after the Central Bank warned his growth forecasts are too optimistic.
In its latest quarterly review, the bank put the rise in economic output (GDP) next year at 2.8pc -- well below the 3.3pc in the Budget calculations.
That difference could mean a €300m shortfall in tax receipts next year, and bank economists urged the minister to cover any loss with more tax rises and spending cuts.
"We will have to wait to see how things are actually going," the bank's assistant director-general, Maurice McGuire, said last night.
"It is possible that growth will be weaker than the original Budget forecast. Unfortunately, further adjustments will be necessary if that is the case." The bank joins the Economic and Social Research Institute in forecasting growth of less than 3pc next year. However, its projected 0.8pc rise in GDP this year is much better than the 1.3pc contraction in the original 2010 Budget figures. Some analysts believe this means Mr Lenihan will beat his target for an €18.8bn deficit this year.
That might allow him to take a two-year view and not immediately cover any shortfall with an even tougher 2011 Budget than the €3bn in cuts and tax rises already planned. The Department of Finance will publish new economic forecasts later in the year. It may also have to reduce its expectations of average 3.7pc growth from 2012, which could require more than the planned €4.5bn in deficit cuts over the following three years.
The bank also joined other analysts in calling on the Government to spell out in more detail how the overall adjustment is to be achieved.
"In order to achieve these targets, it will be necessary to spell out the details of the consolidation measures, implement them without delay and also to stand ready to take further action if needed," the report says.
It argues for any emerging shortfall to be covered.
The report says: "Against the background of tougher fiscal adjustment measures being adopted by other EU member states, early action that has the effect of emphasising the national determination to manage the public finances will help contain borrowing costs on international markets and, ultimately, help to lower the adjustment burden."
The report says the country's competitiveness continues to improve, but calls for long-term wage restraint so that pay costs rise by less than those of our trading partners in the UK and the euro area.
Recovery
"On most measures, there has been some recovery of the ground lost over much of the last decade up to about 2008," the bank says.
"Some of this improvement, however, reflects changes such as the move away from construction and services to the higher-productivity exporting sectors.
"Abstracting this, the underlying improvement, while still significant, is not as great and signals the need for continued wage restraint relative to other countries."
"The economy is unlikely to have the kind of productivity growth in future that would justify faster wage rises than in other countries," Mr McGuire said.
Emigration
But competitiveness involves a mixture of costs and skills, the bank says.
"If costs in Ireland are out of line with competing economies then having a skilled labour force will be of little benefit in itself, with increased net emigration the most likely outcome.
"Similarly, simply driving costs down continually without any investment in a skilled labour force is a recipe for declining, rather than improving, living standards."
The report says the recovery will be driven by exports.
That makes it vulnerable to any setback in the global economy, and also means employment will be slow to rise.
The unemployment rate will average 13.5pc this year, with only a gradual improvement next year to 13.3pc.
"Employment is unlikely to fully stabilise before the end of the year and downward pressure on unemployment from this source will likely only gradually emerge through next year," it says.
- Brendan Keenan Economics Editor
Irish Independent
