More action needed on deficit - ESRI

Further cuts in public expenditure this year are needed to reduce the budget deficit, according to the Economic and Social Research Institute.

In its latest quarterly economic commentary, the ESRI says that the public sector pay bill needs to be adjusted, either through a new voluntary redundancy scheme or extra working hours, while cuts in health, education and welfare are inevitable.

The institute also advocates a number of changes to the tax system, including reform of the vehicle registration tax scheme introduced in mid-2008.

Changes in tax credits and in the width of relevant tax bands could also increase the tax base, it says.

The assessment comes as the ESRI revised its economic forecasts for this year and next. Having forecast in June that Ireland’s gross national product would remain flat in 2012, the think-tank is now predicting that GNP will fall by 0.2 per cent in 2012.

It predicts a 1.8 per cent increase in gross domestic product this year, having forecast a full-year increase of 0.6 per cent in June.

The institute is more upbeat in its assessment of 2013, predicting that GNP growth will be positive at 0.7 per cent next year. It estimates that GDP growth in 2013 will be 2.1 per cent. The more positive outlook reflects the impact of stronger exports and an expected rise in investment next year, generated by foreign direct investment; the Government’s stimulus package announced in July; and Nama’s plan to invest in construction projects.

On the outlook for this year, the ESRI said that significant cuts in public expenditure need to be implemented to return the public finances to a stable pattern.

Asked whether a deal on the repayment of the Anglo Irish Bank promissory note would change the institute’s assessment, the ESRI’s David Duffy said that adjustment would still be required.

“Even if there were no government debt and hence no interest payments, the budget deficit would still be large – day-to-day expenditure continues to outstrip revenue.”

Prof Joe Durkan, one of the authors of the ESRI’s Quarterly Economic Commentary, said yesterday’s economic figures from the Central Statistics Office would have no impact on the ESRI’s projections. The ESRI had predicted that the economy had stagnated in the second quarter, he said.

According to the ESRI’s forecasts, unemployment will remain high for the foreseeable future, with an unemployment rate of 14.8 per cent predicted for this year, while the unemployment rate will fall slightly to 14.6 per cent next year.

Long-term unemployment represents a major concern, the report notes, highlighting the increasing number of long-term unemployed people who have relatively high levels of educational attainment.

The ESRI also notes a sharp decrease in saving rates in Ireland. The personal savings rate fell in 2011 to 5.4 per cent, down from 6.8 per cent in 2010. This compares to a savings rate of 11.4 per cent in 2009.