State should stick with austerity, says ESRI

The Economic and Social Research Institute has this morning called on the Government to go ahead with the planned €3.1 billion in spending cuts and tax increases in Budget 2014.

The think tank believes that, given the very considerable risks the economy faces, the most prudent course of action is to stick to the current adjustment plan.

“As new information becomes available, policy can then be adjusted,” it adds. “It is easier to relax fiscal policy if things turn out better than expected rather than to tighten it if things turn out worse.”

Both trade unions and employers have in recent days called on the Government to ease the pace of budgetary adjustment next year.

Final austerity budget
In its five-yearly medium term review, the institute's economists write that the 2014 budget could be the last austerity budget if the international economy picks up and banking problems are resolved.

In the best-case scenario presented in the 137-page report, the Government could abandon the €2 billion adjustment currently pencilled in for 2015. A neutral budget in 2015 would be the first such budget since 2008.

However, if the worst of the three scenarios it sets out up to 2020 comes to pass, austerity would continue for the rest of the decade. In that scenario, unemployment would remain in double digits until 2020 and emigration would continue.

Speaking at a briefing yesterday, Prof John FitzGerald noted that, as education levels are much higher now than in the 1980s and 1990s, the last time unemployment was high, joblessness should fall more quickly when recovery kicks in. However, he said “the bottom 30 per cent” in terms of educational achievement are vulnerable to becoming stuck in long-term unemployment.

External shocks
The study, which aims "to explore how domestic policy can improve the possible outcomes", also states the Irish growth model is vulnerable to external shocks. As such, it will be important the driving force behind the export sector "moves gradually away from businesses that are dependent on the low corporate tax regime to businesses that rely on other aspects of Ireland's competitive advantage".

The authors admit they underestimated the risks in their last medium-term review, published five years ago as the property bubble had begun to deflate. “The diverse scenarios presented in previous reviews did not properly capture the full severity of the recent crisis,” the report states.