Minister for Finance Michael Noonan said today a gloomy growth forecast from the Economic and Social Research Institute on the prospects for the Irish economy will not lead him to change next week’s Budget.
According to the ESRI report, which was published this morning, much weaker economic growth than previously anticipated in Europe will seriously affect the Irish economy’s performance next year. The report's lead author, Dr Joe Durkan, said Europe faces a repeat of the 1930s Great Depression if the debt crisis is not brought under control
Compared to its last assessment three months ago, the institute is now more pessimistic about next year’s economic prospects by almost every measure, including employment.
At the beginning of September the ESRI believed that the numbers at work in the economy would grow in 2012, the first increase in half a decade. Now it believes that a further net decline of 22,000 jobs will take place between this year and next. Of this, 15,000 will be accounted for by the already much-shrunken construction industry.
Speaking in Brussels today, Mr Noonan said the institute’s latest assessment was in line with other forecasts and the Government was already on “solid ground” with its budget plan.
“Forecasters are changing their forecasts so that’s not unexpected. Ibec changed their forecast, we changed our forecast in preparation for the Budget in the Department of Finance,” Mr Noonan said. “There are two tendencies. One is to mark up growth for 2011 and the ESRI have done that again ... then to mark it down for 2012 and they’ve done that also.”
Mr Noonan, speaking to reporters as he left an EU meeting, said he would not be revising his plans. “I suppose the question is will this change the approach to the budget because the ESRI being a state agency that we take a lot of notice of - it obviously is influential - but it won’t,” he said. “If we you look at their full report, they’re actually predicting that we’ll have a lower deficit than we’ve pencilled in for the budget.
“They’re saying that with the growth rates that we are forecasting we will hit a deficit target of 8.3 per cent at the end of the year so taking their full report into account we don’t have to make any changes in our budgetary strategy.”
Forecasts were moving up and down as a result of the turmoil in the euro zone and the wider global economy, he said. “We’re in a period of great volatility in Europe and indeed in the wider international world so we’ll have to do our best. But we’re about mid-range in the forecast that we have based the budget on so we think we’re on pretty solid ground.
In its latest Quarterly Economic Commentary, the ESRI stresses the importance of a resolution of the euro area crisis for Irish economic recovery. “As long as Europe remains in crisis, there is little prospect of Ireland returning to a path of sustainable, export-led growth,” the thinktank states.
The unemployment rate will stand at 14.5 per cent on average over the course of the year, the report says, up from an average rate of joblessness of 14.2 per cent this year.
Ireland’s gross domestic product, the widest measure of economic activity, is expected to grow by less than 1 per cent next year. Just three months ago, the institute was predicting an expansion of more than double that rate, at 2.3 per cent.
The ESRI is even gloomier on gross national product, a narrower measure of activity which strips out the effect of multinationals’ profits. Following an increase in GNP in 2011 (the first such increase since 2007), the institute expects a contraction of 0.3 per cent next year.
The institute does not hold back in its criticisms of the policy response to the euro area crisis. The outcome of the latest emergency summit of EU leaders, which took place at the end of October, is “clearly” not adequate to address the problems, the report states. “The present situation contains elements reminiscent of policy during the Great Depression, when a mounting crisis was confronted by an orthodoxy that resulted in great poverty that could have been avoided,” the report adds.
The ESRI report expresses some disappointment at the Government’s Medium-Term Fiscal Statement, which was published earlier this month. It had previously applauded the Coalition’s intention to set out tax and spending plans to 2015 so that households and businesses could plan accordingly. But the effect of the announcements three weeks ago on reducing uncertainty will be more limited than anticipated owing to “somewhat less detail than might have been expected”.
Despite the downward revision to its forecast for next year, the ESRI believes that the Government’s budgetary targets are “achievable”.
Speaking this morning, Dr Durkan warned of the effect a European recession might have on Ireland. "The forecasts that are around for the euro zone next year imply little or no growth on an annual basis. When you take account of the fact that output grew throughout this year it implies that output is actually going to fall from roughly the end of this year until the end of next year and probably well into 2013 as well," he told RTÉ's Morning Ireland.
"What that does is that it affects our exports and because it affects exports, it affects employment and then it affects incomes and that's how it spreads to the economy.
"Even though it seems pessimistic, the truth of the matter is that we don't know how bad its going to be in Europe yet because we think investment has been hit all over the place not just here ... and that could have a much bigger impact than we have built in," he said.
Under the terms of Ireland’s EU-IMF bailout, the Government is obliged to cut its deficit to 8.6 per cent of GDP. The ESRI expects an imbalance between spending and revenue of 8.3 per cent. This, however, is considerably larger than the figure it was forecasting three months ago.
In the bailout documents published yesterday, the reference in the leaked version to levying an annual €100 a year household charge on primary residences has been changed. No cash figure for the household charge was specified.
Reference in the leaked document to a “reform of capital gains taxation” did not appear in the final draft published yesterday. All targets of the amounts to be raised by new tax measures were also omitted.