ESRI warns against budget adjustment of less than €3.1bn

The Government risks missing its fiscal targets for next year by opting for a budgetary adjustment of less than €3.1 billion, the Economic and Social Research Institute (ESRI) has warned.

In its latest quarterly economic commentary the think-tank delivered one of its most upbeat assessments on the economy since the financial crash, forecasting gross national product (GNP) growth rates of 2 per cent for this year and 2.7 per cent for 2014, well ahead of current Government predictions.

However, it warned the reduced budgetary target of €2.5 billion, signalled by Minister for Finance Michael Noonan yesterday, could trigger another round of austerity measures in next year's budget if the Government's growth forecasts fail to materialise.

In its analysis the institute predicted the public finances would come in ahead of target this year, with borrowing at around 7 per cent of GDP, below the troika ceiling target of 7.5 per cent.

It said it continued to hold the view that "the most prudent course of action" was to implement an adjustment of €3.1 billion in next week's budget.

Troika target
This level of adjustment would reduce the budget deficit to 4.5 per cent of GDP by the end of next year, it said, significantly below the troika target of 5.1 per cent, which would allow the Government end the current sequence of austerity budgets.

“Our view is it’s safer to do the €3 billion this year, but if they [the Government] do €2.5 billion they may get away with it provided the growth forecasts are correct,” said Prof John FitzGerald of the ESRI.

Having predicted in July that Ireland’s GNP, a more accurate measure of the country’s economic activity, would grow by 1.2 per cent this year and 0.5 per cent in 2014, the institute revised these figures upwards to 2 per cent and 2.7 per cent respectively.

While it cautioned that the forecasts were heavily reliant on growth predictions in the euro zone and elsewhere, the ESRI said there were now “definite signs of recovery” coming from several sectors of the economy.

The institute’s forecasts are more optimistic than the Department of Finance’s own projections released yesterday, which predicted GNP would grow by 1 per cent this year and by 1.4 per cent in 2014.

However, the ESRI lowered its predictions for GDP growth, the widest measure of wealth created by an individual country, to 0.5 per cent this year and 2.6 per cent for 2014. It cited falling profits in some of Ireland's biggest pharmaceutical companies as a result of a "patent cliff".

Blockbuster drugs
Over the last couple of years a number of big blockbuster drugs produced here, most notably cholesterol drug Lipitor, have fallen out of patent.

In its commentary the institute said the “clearest signal” of recovery was reflected by the continued growth in employment and the downward slide in unemployment, which it predicted would fall below 300,000 this year, and continue on a downward trajectory in 2014.

It forecast that unemployment would hover at around 13 per cent next year, which was higher than the Department of Finance’s forecast of 12.6 per cent. For the first six months of the year, the ESRI noted, there was an increase of 27,300 in total employment, compared with the first half of 2012.

While agriculture, forestry and fishing remained the source of the largest increases in employment, the institute said it believed these sectors may be artificially inflated and that improving employment conditions were more likely coming from expansions within the services sector.