Economist urges Lenihan to breach Maastricht limits

THE MINISTER for Finance, Brian Lenihan, should "significantly breach" the Maastricht limit on public finance deficits in 2009, according to Bloxham Stockbrokers economist Dr Alan McQuaid, who is predicting Gross Domestic Product (GDP) could contract by as much as 2.5 per cent this year.

A Reuterspoll of economists in August found that, on average, they expected a 0.9 per cent contraction.

Dr McQuaid said given that GDP growth was 6 per cent last year, the economy is set for a "crash landing" in 2008, even if the Reuters poll proved to be the correct prediction.

He said the Government should budget for a 5 per cent deficit next year, despite the stability pact rules that prescribe a maximum deficit of 3 per cent.

Briefing journalists on his quarterly economic outlook, he said the Government needed to recognise the seriousness of what was happening, both nationally and globally, and show it could react.

"The bottom line is that the economy is in such poor shape at the moment that only a significant breach of the stability pact rules through a substantial fiscal package will put the economy back on the road to recovery."

He said all the signs were that Mr Lenihan was intent on staying within the stability pact rules and being "a good European".

"If the Government raises taxes and cuts expenditure in an effort to keep Brussels happy, then the outlook is going to be pretty gloomy."

Dr McQuaid said house completions this year would be 45,000, falling to 24,000 next year. Barring a stimulus package from the Government, unemployment would rise to close to 8 per cent next year.

However, he believed inflation pressures would fall back next year and growth might resume late in 2009.

He predicted all 15 eurozone countries would be close to, or in, recession by the end of this year.

Mr Lenihan needed to react creatively to the crisis and not be fixated with balancing the books, Dr McQuaid said. Positive measures to stimulate the economy and boost confidence should be taken, irrespective of EU rules.

He suggested such measures as income tax cuts, the privatisation of State companies, a pay freeze for public servants, a support scheme for exporters, reduced VAT on energy bills and reductions in stamp duty.

He said the suggestions he was making were an effort to stimulate debate."People on Wall Street are saying this is the worst crisis we've seen, ever. So we need to pay attention."

Dr McQuaid expects house prices to fall by 9.8 per cent this year, and 7.5 per cent next year.

Bank of Ireland economist Dr Dan McLaughlin said he expected house prices to fall by 8 per cent this year.

Speaking at the launch of the bank's quarterly analysis of the property market, he said house prices are now falling at a slower rate. "It may well be 2009 before signs of stability emerge."