Economist says Irish economy will shrink by 6.6% this year

THE ECONOMY will shrink by 6.6 per cent this year and is unlikely to return to growth before 2011, a leading economist predicted yesterday.

Presenting his quarterly economic outlook, Friends First economist Jim Power said next week’s emergency budget would not be a “silver bullet” and the recovery process would be slow.

The prospect of a domestic recovery materialising in 2010 was “a bit of a pipe dream” as it was contingent on several factors such as an international recovery, credit availability and the bottoming of the housing market.

Property prices have plummeted by an estimated 40 per cent since peaking in 2006. Mr Power predicts a further correction of 10 to 15 per cent is yet to come.

He said there was scope to increase the top rate of income tax by four percentage points in the longer term. However he warned that it was not possible for a country to tax its way out of a recession.

“The Minister for Finance will have to be careful that he does not finally kill off the consumer with ill-judged tax increases.” The key focus should be on cutting public spending.

He also suggested that the Government introduce a holiday from employers’ PRSI in a bid to preserve jobs.

He said reducing or cutting the minimum wage was also something that should be considered now as many sectors, particularly tourism, were “being undermined by the minimum wage”, which was a “major source of lack of competitiveness”.

As a small, open economy, Ireland must focus on the quality rather than the quantity of employment creation and economic growth, which must be spread across diversified sectors.

“We can’t become inordinately dependent on a single sector.”

He also condemned what he described as a “witch-hunt” against Gerry McCaughey, who recently stepped down from two State bodies over what Mr Power described as a “legitimate tax arrangement”.

He said at times like this the country needed people of Mr McCaughey’s calibre, saying that if he was in his position he would leave the country.

“People like that cannot be forced out of the country,” he said.