ESRI calls for 20% child benefit cut and welfare freeze

ESRI REPORT:CHILD BENEFIT should be cut by 20 per cent and social welfare payments frozen, but the package of tax increases in the budget should be limited to €1 billion, the Economic and Social Research Institute (ESRI) said yesterday.

In its latest Quarterly Economic Commentary, the ESRI also said the poor state of the public finances meant further public sector pay cuts were necessary.

However, the authors of the commentary – Dr Alan Barrett, Dr Ide Kearney and Jean Goggin – did not back calls in the McCarthy report to cut welfare payments by 5 per cent, saying they should be frozen instead.

The consumer price index, which is falling at an annual rate of 6.5 per cent, was “not necessarily the decider of where welfare should be”, Dr Barrett said, because lower-income people do not benefit from deflation to the same extent.

It would be preferable in the long term to tax child benefit, but a 20 per cent cut should be implemented in the short term, the ESRI indicated: “Obviously it’s not pleasant, but you do get €500 million in savings,” Dr Barrett said.

A budget package of expenditure cuts and tax increases totalling €4 billion was “appropriate”, despite the deflationary impact it would have on the economy, according to the ESRI bulletin.

The budget measures will have negative knock-on effects on consumer spending and will be the main drag on economic growth next year, the ESRI said. It believes the measures are needed to restore confidence among consumers that the Government is tackling the public deficit and most of the pain is out of the way.

“We need to make people confident that the economy is on the right track,” Dr Kearney said.

Even a package of €4 billion is only set to stabilise the deficit, rather than reduce it, according to ESRI forecasts, which suggest that the general Government deficit will be 12.9 per cent of gross domestic product this year and 12.8 per cent next year.

Dr Kearney emphasised that all of the ESRI’s forecasts “absolutely hinged” on an imminent recovery in the global economy. “Every delay in the world economic recovery weakens the Irish economy,” she said.

Dr Barrett said he would be “uncomfortable” if the tax element of the €4 billion raised in the budget exceeded €1 billion.

Both spending cuts and tax increases dampen growth, but “going the tax route is more damaging”, he said. About €500 million to €600 million of this €1 billion could be raised from a carbon tax, he added. Meanwhile, the issue of public sector pay rates is “still on the table”, he said. Apart from “the perceived premia” on public sector wages versus private sector ones, Dr Barrett said it could be argued “that the public finances are in such a poor state, that you have to go after that block that is public sector wages”.

The ESRI expects the economy to contract by 8.7 per cent this year and by 1.7 per cent in 2010, in terms of gross national product.

Since its last quarterly commentary, the forecasting body has become less pessimistic about employment and expects unemployment to peak at 14.8 per cent next year. “This is largely due to a faster fall in participation rates than we had expected,” Ms Goggin said. The participation rate, or the percentage of the population aged 15 to 64 that is part of the labour force, is predicted to fall 1.5 per cent during the period 2008-2009, meaning there will be some 50,000 fewer people in the labour force.

The ESRI forecasts that there will be net migration of 40,000 people from the State over the 12-month period to April 2010.

Increases in mortgage interest rates will also hit borrowers next year, according to the ESRI. It expects that the European Central Bank will raise its key interest rate to 1.75 per cent by the end of 2010.