ESRI says State shouldn't spend privatisation cash on job schemes
Think-tank trims growth forecasts for this year and 2013 - sees some EU lift
THE Government is wrong to spend money from forthcoming privatisations on job schemes, the Economic and Social Research Institute warned yesterday.
The Government plans to privatise Bord Gais Energy next year and sell off its remaining stake in Aer Lingus and use some of the proceeds to fund a job creation scheme.
The plans were initially opposed by the International Monetary Fund and the European bailout partners but the troika later relented in return for promises for more asset sales.
ESRI economist David Duffy said yesterday that stimulus schemes rarely work in small and open economies. Any money raised from privatisations should be spent on debt reduction, fellow ESRI economist Joe Durkan added.
The think-tank also poured cold water on the Croke Park agreement, saying that any new agreement should be more flexible. The agreement "limits the amount of adjustment that is possible", Mr Duffy said. "Given the size of the public sector, you would need to look at whether the size is appropriate for Ireland," he added.
Prof Durkan reiterated his view that the Government will be forced to seek fresh funds from Europe when the present bailout fund runs out but warned that full fiscal union between eurozone countries would be difficult because member states have different pension and social welfare systems as well as different defence commitments.
"I always thought that," he added. The Government has repeatedly claimed that the bailout plan is on track and the State will begin selling bonds next year to raise the €20bn that the State needs before 2015.
The ESRI predicts that the economy will stagnate as the euro crisis continues but things could get much worse if things in Europe go wrong, the Economic and Social Research Institute warned yesterday.
The ESRI trimmed forecasts for this year and next year but still sees some growth if European leaders "muddle through", Prof Durkan said.
"If we are wrong, then the outcome will be much weaker," his colleague David Duffy added. Further problems in Europe could "impact quite severely", he added.
The think-tank will probably publish a report on the potential impact of a full-blown crisis on Ireland in three months' time, Prof Durkan said. Small trading nations like Ireland are vulnerable to any sharp downturn. "It's on our minds," he said. "If the Greek thing (elections) had gone the other way then I'm not sure what we would be saying," he added.
Other research in yesterday's report which had been due to be released today but was published yesterday as a result of a technical fault, concludes that savings in most households are lower than many economists previously estimated.
Economists track the "savings rate" which has shot up since the economy collapsed, sparking fears that people are hoarding savings.
The savings rate includes money kept in bank accounts and money used to repay debts such as mortgage repayments.
An analysis by the institute shows most of the so-called savings recorded by Irish citizens are being used to repay debt. This means that households will probably continue to save once the economy rebounds to repair their savings.
The decline in labour costs and rise in productivity at indigenous Irish manufacturing companies were "subdued" although they have still fallen by a fifth, the ESRI said. Most of the recorded falls in salary costs were in the hi-tech multinational sector, the institute added.
Turning to economic growth, the latest quarterly report predicts the economy will expand by 0.6pc this year and 2.2pc in 2013. In February, the ESRI predicted GDP growth of 0.9pc this year and 2.3pc next year.
Household spending will fall 2pc as disposable income continues to shrink, the ESRI added. Government expenditure will contract 2.3pc, it said.
Unemployment is seen peaking this year at 14.9pc before inching downwards to 14.7pc next year as emigration pushes down the total number out of work and claiming benefits.