Howlin rejects ESRI criticism of stimulus package

 

MINISTER FOR Public Expenditure and Reform Brendan Howlin has robustly rejected arguments by a leading think tank that attempts to stimulate the Irish economy domestically should be avoided by Government.

In its latest Quarterly Economic Commentary, the Economic and Social Research Institute (ESRI) said Ireland would likely need further bailout funding after its current three-year rescue package expires next year.

It also stated that the proceeds of any privatisations should be used to pay down government debt rather than on any form of stimulus package.

The authors say they would be “very cautious about a domestic fiscal stimulus in Ireland, however funded, as history and experience shows that such a stimulus would have little effect on the domestic economy, but would lead to a worsening of the balance of payments.

“The crises of the 1950s and the 1970s-1980s provide sufficient cautionary evidence that, given the openness of the Irish economy, a large portion of any stimulus would go directly into imports.

“Selling State assets to provide a limited, in extent and time, stimulus is not obviously an efficient use of funds,” they conclude.

When the terms of Ireland’s International Monetary Fund-EU bailout were drawn up in late 2010, one condition was that all privatisation proceeds would go to paying down debt. The current administration, which took office in March 2011, has consistently sought a change to this term so that it could fund a stimulus package.

Responding to the think tank’s latest findings, Mr Howlin said: “Academic research is one thing but the social imperative of getting people back to work is another and is far more important in the current climate.”

He said a domestic stimulus package aimed at improving the State’s economic capacity was not the same “as the kind of reckless current side spending that has characterised previous government attempts at stimulus”.

The Coalition had been arguing there was a need for greater focus on growth at European level that would support Ireland’s export-led recovery.

“Using proceeds from the sale of State assets to pay down debt would only represent a tiny reduction in our overall debt levels,” he said. “However, the prospects of getting people back to work will support our domestic economy and generate much-needed confidence in the Irish economy.”

Mr Howlin said every option to tackle Ireland’s unemployment problem had to be considered.

In its regular quarterly assessment of economic prospects, the ESRI said the Irish economy will grow less strongly than previously anticipated this year and next. Gross domestic product, the widest measure of economic activity, is expected to increase by 0.6 per cent this year and 2.2 per cent in 2012. In its last forecast, published in February, the institute expected rates of growth of 0.9 per cent and 2.3 per cent in those two years respectively. It has made similar-sized cuts to its forecast for gross national product, a narrower measure of activity.

Weaknesses in the economy’s most important export markets – the euro zone and Britain – were the main reasons given for the revisions.

Another reason given was a change to the institute’s analysis of the extent to which households are saving for precautionary reasons.

It had been believed that much of the increase in savings rates since the recession began had been for precautionary reasons and that once greater confidence was engendered, such savings would be reduced, thus boosting spending.

However, evidence from the Household Budget Survey finds that there has been little increase in precautionary savings. As a result, there may be less scope for a decline in savings and increase in consumption, even in the event of greater certainty about future economic prospects.

Forecasts on joblessness have also been downgraded. The unemployment rate is expected to peak this year at just under 15 per cent and decline only marginally next year, to 14.7 per cent. In its last report, the institute expected the jobless rate to be a full percentage point lower in 2013.

The ESRI’s forecasts for the labour market are predicated on net outward migration of around 45,000 people both this year and next.