ESRI call for cutbacks rejected

The Economic and Social Research Institute has lowered its growth forecasts for the economy while urging the Government to cut its budget deficit more rapidly than planned.

The institute, which published the views in its Quarterly Economic Bulletin this morning, called for a budget adjustment in 2012 of up to €4 billion.

The Government is committed to a €3.6 billion combined package of spending cuts and new taxes.

But Siptu general president Jack O’Connor this morning said implementing further cuts would be “the single worst thing we could do”.

“It would further retard our anaemic growth prospects. Even the employers’ organisations are opposed to any measures beyond the requirement to reduce the deficit by 8.6 per cent of GDP in the EU/ECB/IMF plan by next year,” he said.

“These measures have been inflicted on people across our society with appalling consequences for the most vulnerable. The focus now must be on jobs and growth. This is the key to recovery and it is also, incidentally, the key to building confidence in international markets.”

The think tank remains strongly upbeat about the prospects for exports in 2011-2012 but believes that the domestic economy will continue to contract over the next year.

The continued weakness in the domestic economy is hitting job creation, according to the report.

The ESRI now expects net job losses in this year of 45,000, a considerable increase on its last forecast three months ago when it expected 28,000 fewer people to be working in 2011.

Next year, it expects the first net increase in jobs in five years but at only 12,000 this will not be enough to soak up all new entrants to the labour force.

As a result, the ESRI expects the rate of unemployment to rise from an expected 14.3 per cent this year to 14.5 per cent next year.

Yesterday, new figures from the Central Statistics Office showed that unemployment stood at 14.4 per cent in August, up from 14.3 per cent in July.

The ESRI report describes the changes to the terms of EU bailout funding, agreed in Brussels on July 21st, as “very favourable to Ireland”.

Reflecting the large cut in the interest rate charged on EU bailout funds agreed in July and the lower than previously estimated bank rescue costs, the institute believes that public debt will peak at a lower level than it did in its last report.

"The Government could cement our credibility by surprising the market either by bringing forward the budget or doing more," said Dermot O'Leary, an economist at Dublin-based Goodbody Stockbrokers. "That would continue the strategy of trying to distinguish ourselves from Greece and Portugal."

In 2012, public debt is expected to reach 109 per cent of gross domestic product (GDP). In its last report three months ago, the think tank anticipated a public debt to GDP ratio of 116 per cent next year.

The ESRI’s more positive view on public indebtedness echoes the more positive sentiment of investors in recent weeks. Yesterday, yields on Irish Government 10-year bonds fell below 8.6 per cent for the first time since January.

They are now almost 5.5 percentage points down on their peak of six weeks ago.

"People in the market are interested," said Gavin Blessing, a fixed-income analyst at Collins Stewart Plc in Dublin. "They are joking that Ireland is the new safe haven."

The institute praised the European Central Bank for buying the bonds of weak governments, which has helped lower their effective cost of borrowing.

However, it said that “the policy shift needs a strategic underpinning, rather than a grudging acceptance of an unwanted role”.