Strategies for growth

How best to drive economic growth? With the Irish economy in the first quarter of this year slipping back into recession for the second time since 2009, this is the challenge that the Government faces in planning the 2014 budget next October. Ibec, the employers’ group, in its pre-budget submission, argues for some limited easing of austerity measures as the best way to rebuild consumer and business confidence and to boost growth. Since 2008, six budgets have involved spending cuts and tax rises of €28.1 billion. Ibec argues that next year’s planned adjustment of €3.1 billion – agreed with the troika of international lenders – should be reduced by €500 million, by the Government scrapping planned tax rises for 2014.

The case made for a little less austerity is that this would benefit the economy, without jeopardising progress made in stabilising the public finances. Even if the pace of fiscal consolidation were to slow next year, Ibec estimates a budget deficit of 4.5 per cent of GDP would both be attainable, and below the target set in the bailout programme. Ibec’s chief executive Danny McCoy has said the budget “must clearly signal that the end of austerity is in sight”. Interest savings of €1 billion on the promissory note deal have encouraged Ibec to press for less austerity next year. Those savings also allow the Government more latitude – should they choose to take it – in framing the budget.

Ibec’s view marks, for the first time since the onset of the financial crisis in 2008, a policy difference with the Government on the pace of fiscal adjustment. Ibec feels that now is the time for more focus on the economy, given the progress made in achieving fiscal consolidation, and the scope that €1 billion in savings now offer. A Government decision against new or additional tax rises next October would, the employers’ group contend, signal the beginning of the end of austerity. Its net effect would be to create a climate of greater certainty and confidence that would reassure households, unlock consumer spending, and thereby give the domestic economy a boost.

Nevertheless, there are some grounds for caution. The economy’s return to recession reflects in large measure the failure to achieve an export-led recovery, on which Ireland greatly relies for economic growth. Domestic demand, while important, is not the key to economic recovery. And with Ireland planning to leave the bailout programme later this year, and once again reliant on market funding for its borrowing needs, the Government will be concerned not to send the wrong signal to potential lenders. For the Government the key budget choice in next October’s budget may well be between easing up on austerity, and risking its international reputation in financial markets; or maintaining the pace of fiscal adjustment, and further enhancing its high standing there.