Business Irish

Friday 20 April 2018

ESRI report: Taoiseach agrees must stick to austerity plan

Taoiseach Enda Kenny
Taoiseach Enda Kenny

Fiach Kelly and Brendan Keenan

TAOISEACH Enda Kenny says the Government must stick to its budgetary targets to exit the bailout, but did not give any indication as to whether there will be any let up in austerity.

Mr Kenny was speaking after the Government think tank, the Economic and Social Research Institute (ESRI), said the Coalition must stick to its plans for €3.1bn in cuts and taxes in the October budget.

It came after unions and employers called on the Government to use the €1bn promissory note deal to ease up on austerity.

The Taoiseach said the ESRI "endorses" the Government's approach, but did not give any indication ministers will change their plans for the Budget.

Mr Kenny also said there will be a special cabinet meeting on job creation next week.

THE ESRI warned earlier that the Government risks needing even bigger packages of spending cuts and taxes in the coming years if it eases up on austerity in October's budget.

The Coalition is widely expected to use the €1bn windfall from the deal on Anglo Irish Bank promissory notes to scale back the €3bn in planned tax rises and spending cuts next year.

But the authors of a new report for the Economic and Social Research Institute say tougher Budgets may be needed in 2015 and 2016 if the brakes are taken off too soon. The warning is contained in the ESRI's first attempt at medium-term forecasting since the start of the economic crisis.

The stark warning about potential damage to the economy's long-term prospects will put pressure on the Government to rethink its strategy of using the dividend from the pro-note deal to ease up on the austerity measures.

ESRI research professor John FitzGerald said an easier Budget would help growth in 2014, but would add to problems later if the European economy does not recover.

"If they don't implement the original plan and problems persist in the EU and Irish economies, they will need to do bigger cuts in 2015-16," he said.

"It is demoralising to stop cutting and then have to start again. That is what happened in the mid-1980s, which had to be followed by more severe adjustments from 1986."

The Government now has €1bn to play with over two Budgets, but there is pressure to frontload the benefits into Budget 2014.

Finance Minister Michael Noonan last week gave his strongest indication yet that the savings could be used to ease the €3.1bn of cuts and taxes planned for the October Budget, but said he would not make his mind up until a month out from Budget Day.

Mr Noonan said the €1bn in savings could be used to ease up on cuts and taxes, invest in infrastructural projects or a mix of these options.

Both the employers' body IBEC and the trade unions have supported the easier stance, while disagreeing on the details.

The Government wants the public to see some easing of austerity ahead of next year's local and European elections.

But it will also be conscious of ensuring the economy is seen to be improving by the time the next general election comes around in 2016.

The prospect of having to bring in increased austerity measures in the run-up to the general election will be even less appealing.

But the ESRI analysis finds that Ireland's prospects over the next six years are almost entirely dependent on conditions in Europe.

At best, the country will have almost a lost decade in terms of economic growth. At worst, it will be well into the 2020s before national income is back to the levels of 2007.

"If Europe recovers and we manage to fix the Irish banking system, a €3bn adjustment next year would be the end of it. There would be no need for any more," Dr FitzGerald said.

But he added that amid continued uncertainty, "the Government should go ahead with the full programme, because we just don't know what is going to happen".

The report draws up three scenarios, which observers last night dubbed 'The Good, the Bad and the Ugly'.

Dr FitzGerald said there was not enough data to put probabilities on them, but the difference between the scenarios is enormous.

Under the first, the EU economy begins to recover next year as austerity is eased in countries like France and Spain.

At the same time, Irish banks begin to offer more credit, and Irish firms and households increase their borrowings.

SURGING

That could see the economy surging by more than 4pc in 2015, and averaging 3.6pc to 2020.

The unemployment rate would fall by half to 6pc and net emigration would cease.

A second scenario involves continued constraints in the Irish financial system. The report analyses the effect of another €7.5bn having to go into the banks and NAMA – while not predicting this will be needed. The economy still grows by 3pc, but without the initial boost, and it is 2018 before unemployment starts to fall.

There is also a "doomsday" scenario, where the EU economy continues in a 'zombie' state like Japan in the 2000s. Because of its dependence on trade, there is nothing the Irish Government can do to prevent continued stagnation under this scenario.

Irish Independent

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