Eye-catching proposals from man at ESRI helm

COMMENT:THERE HAS been a changing of the economic-forecasting guard at the State's leading think-tank, the Economic and Social Research Institute (ESRI). Taking over from the youngish Alan Barrett is the 69-year-old Joe Durkan. The new man is his own man.

Unexpectedly, Durkan has brightened the institute’s outlook for economic growth this year and next.

Three months ago, the ESRI believed gross domestic product (GDP) would grow by 1.5 per cent this year. While other analysts have been in a race to the bottom recently, slashing their growth predictions, the ESRI’s forecast has jumped to 2 per cent. This is four times the rate of expansion predicted by the IMF’s gloom-mongers in Washington and more than twice the rate anyone else is predicting.

The accompanying table shows just how much of an outlier the institute is, and gives a full picture of what the main forecasters believe will happen to the economy this year and next.

Durkan does not believe in being held hostage to past forecasts and closes his eyes to the consensus. When asked what his predecessor forecast three months ago, he said candidly, “I haven’t a clue”.

Consistency is the hobgoblin of small minds according to the old adage, and according to Durkan too, it would seem. But he is right to start with a blank slate in his new job. Forecasters tend to herd because nobody has ever been castigated for making a prediction that proves to be wrong but that most other forecasters have also made. But, if an economist makes a call that others aren’t making and gets it wrong, he’ll never live it down.

The safest way to survive in forecasting is to stay at the centre of the pack. Durkan, who forecast at the institute for 14 years from 1969, appears to care little about being wrong in isolation and feels free to wander off on his own. His disregard for the consensus was in evidence on many other issues yesterday at a briefing on the institute’s latest 50-page analysis of the prospects for the Irish economy.

Among many eye-catching proposals, Durkan, and by extension the ESRI, wants an even bigger budgetary adjustment than the four-year, €15 billion package the Government is implementing. Central to this, he said, should be public sector pay cuts. His ilk is overpaid, he opined, and when asked, said he would take a 20 per cent salary cut.

He also believes the State’s capital spending (money invested in roads, schools and the like) cannot be justified and needs to be cut further. He instanced Metro North as an example of a project ripe for cutting.

He went on to express frustration at the new Government’s timidity in making decisions. The McCarthy report on the State’s assets provides all the material any Government needs to make choices on what to sell off and what to retain. There is no reason for further reviews. “Just do it,” he urged.

He also stuck his neck out on the likely future pattern of consumer spending. He believes the protracted contraction in consumption hit bottom at the end of last year. Consumers are now opening their wallets and purses, he believes. And this despite higher taxes, higher interest rates and fewer people at work.

It is to be hoped that Durkan is right and most other (less upbeat) forecasters wrong.

Central to improving the State’s chances of avoiding default will be the willingness of other European countries to share the costs of the banking fiasco, Durkan believes. He thinks an unburdening of approximately €40-50 billion of debt would do the trick and mused that the European Central Bank might be so kind to pick up such a massive tab.

One can only wonder on what basis the good doctor thinks this likely to happen. The chances of the ECB relieving us of tens of billions of euro worth of debt are between zero and none.