Goodbody says mini-budget needed to address 4.5% slump


THE GOVERNMENT will have to introduce a mini-budget in early 2009 because its forecasts for tax revenues and consumer spending are far too optimistic, Goodbody Stockbrokers said yesterday.

The economy will shrink by 4.5 per cent next year in terms of gross national product (GNP), not the 1 per cent that the Government forecast on Budget day, Goodbody economist Dermot O'Leary said.

This means that the Budget day package of tax hikes and spending cuts will not be enough to drag the economy into a recovery, Mr O'Leary said.

In one of the most dismal outlooks for the economy yet, the Goodbody report, called Deleveraging the Irish Economy, says that Ireland has moved into "uncharted waters".

The global economy will recover in 2010, but Ireland will not participate in it, he said, because it will take a few years "to take the slack out" of the economy and work through an overhang of vacant housing stock.

The Government's target to bring the State deficit in public finances back to 6.5 per cent of GDP next year is "overly optimistic and may be too aggressive for the economy to handle".

Instead, the Budget should be followed up by a mini-budget that includes a programme for economic recovery over the medium term. This should target more cuts in current spending rather than placing a higher burden on taxpayers, he said.

Meanwhile, the €18.7 billion in the National Pensions Reserve Fund should be dipped into to plug the hole in the public finances, Mr O'Leary said.

"It's not as if it will go into a black hole. It will go into investment in the economy."

The Government said on Tuesday that it is reviewing its annual 1 per cent of GNP contribution to the fund, which is designed to fund State and public sector pensions from 2025 onwards.

The Goodbody report is also one of the first to consider the impact of the banking crisis on the wider economy.

It concludes that the obligation upon banks to reduce their exposure to risk means that the loan-to-deposit ratio will come down and that the availability of credit will contract.

The loan-to-deposit ratio rose to 220 per cent this year, up from 140 per cent five years ago.

Before construction activity can return to fundamental annual levels of housing demand of around 40,000-50,000 new units per annum, around 19 months' supply of unsold second-hand housing stock must be worked through first, Mr O'Leary said.

Some 148,000 housing units have been built since April 2006, but only 86,500 mortgages have been issued during this time. Adding the vacant number to the estimated number of holiday homes suggests that there are around 100,000 houses sitting vacant across the State.

Analysis of the 2006 census data shows that the counties with the highest vacancy rate - Leitrim, Longford and Cavan - have also seen the highest levels of housebuilding per capita since then.

In a separate report, Merrion Stockbrokers predicted that 28,000 new homes will be built in the Republic in 2009, from a forecasted estimate of 45,000 for this year.

In a survey of housebuilders that covered companies responsible for 5 per cent of last year's output, over half said that they expected to complete 30 less new homes next year, while 45 per cent said they would build no new houses in 2009.

"We conclude that there will be around 45,000 units completed in Ireland in 2008, around 15,000 of which may come from one-off and social housing," said analysts Killian Jones and John Mattimoe.

"For 2009, we expect that there will be around 28,000 units completed, a decline of 38 per cent year-on-year, with around 10,000 of these coming from one-off and social housing."

This indicates a year-on-year fall of around 40 per cent in the private housing units built.

Over half of those surveyed believe that selling prices are down by around 10 per cent to 20 per cent in the past year, and 68 per cent of them believe that prices will fall further next year. Twelve months ago, nine out of 10 of them said that prices would not change.