Has the Irish economy melted its wings?

Best-case scenario: Is the Irish economy about to crash to earth? Not according to the Economic and Social Research Institute's Medium term review 2003-10 which argues there's no need for alarm but plenty of reason for careful planning, writes Una McCaffrey.

Comparisons between ill-fated Greek hero, Icarus, and the seemingly vulnerable Irish economy could be a touch alarming if viewed in a certain light.

The possibility that the Republic's period of high living could be brought to a speedy close with a nasty plunge into fatal waters is, after all, hardly a reassuring thought.

Happily, the hardy individuals at the Economic and Social Research Institute (ESRI) believe the bird-man's unfortunate end will not be shared by Irish consumers or businesses this year or any time between now and 2010.

The institute's Medium-Term Review 2003-10 suggests that we will not crash land, but rather will descend softly and gracefully before soaring up once more and finding the level of growth - in the region of 3 per cent in GNP terms - that suits us best. Or at least this is how it will be if all goes to plan under the ESRI's "benchmark" scenario. If unforeseen problems step in along the way, the wings could, the ESRI's experts warn, melt after all.

In the more positive picture, the authors of the Review see the economy's "underachievement", or singed wings, in the first half of this decade being offset in the second half by a period of growth above potential.

This pattern, supported by recovery in the global economy, would lead to GNP expansion of 2.4 per cent this year, rising to 5.7 per cent by 2008, before tapering off to about 3 per cent in the period beyond 2010 in line with demographic constraints.

Gross domestic product (GDP) would come in at 2.6 per cent in 2003 and then rise to 6.6 per cent by 2006 and level off to 5 per cent at the end of the decade.

This growth would, the ESRI points out, be "well above the dreams of our EU neighbours".

It would allow full employment to be restored by 2010 and result in the Irish economy following other rich countries by shifting away from manufacturing and towards high value-added service activities.

By the end of the decade, almost half of all employment will come from such operations, according to the benchmark forecast. It also foresees a "painful" period for the construction sector as it adjusts to lower output.

Irish labour costs would match those of other high-cost locations within the euro zone, with the partnership process helping to bring the economy through "what is likely to be a temporary period of difficulty" over the next couple of years. Productivity would improve at the same time, thus ensuring greater competitiveness.

The public finances meanwhile would also be steered carefully through current challenges before reaching a period of greater comfort, or small surplus, from 2005 onward. Contrary to the plot of the myth, Icarus would thus survive his perilous flight relatively unscathed, learning a few essential lessons along the way.

In typically helpful fashion, the authors of the Review are giving the Minister for Finance, Mr McCreevy, the chance to learn these lessons now so that the upturn, when it arrives, might be expedited.

Infrastructure tops this list of "medium-term challenges", with the success of the benchmark forecast conditional upon the broad sweep of the National Development Plan being implemented between now and 2015.

The ESRI notes that the pressures attached to funding this "major catch-up in infrastructure" should ease as the decade progresses, but is somewhat concerned about where the money will come from in the short term.

This anxiety is heightened by the realisation that the financial burden on the current generation is heavy: we are paying for the infrastructure of the future while losing out through the disruption its development is causing.

Furthermore, we are also part-funding our own pensions through contributions to the National Pensions Reserve Fund (NPRF). This cumulative effect means the Republic is spending about twice as much as many other EU countries on public investment. Such a strategy, in the eyes of the ESRI's economists, may not be the most sensible at the moment.

An alternative, the economists suggest, would see some "limited" borrowing on the infrastructural front being accompanied by a radical change to pensions policy. They reckon that current contributions to the NPRF, amounting to 1 per cent of GNP each year, may be "premature" and could be delayed for the sake of "inter-generational equity".

A better move, according to the economists, may be to leave the NPRF aside until the infrastructure needed by the economy is in place.

When this job is complete in 2015, "spare" cash equivalent to some 3 per cent of GNP will become available each year, and could easily be used to fund future retirement provision, they say. By 2030, the NPRF would, according to the analysis, be worth more than it would have been at the current rate of saving.

Policy shifts are recommended in other areas too, with the Government advised to embark on "a gradual shift in industrial policy to reflect the "maturing" of the economy. A focus on attracting manufacturing should "evolve" into the promotion of skills and processes and raising the appeal of regional "gateways", according to the Review.

In this way, and provided that the sun does not fall from the sky in the meantime, the Government will help ensure that its Icarus manages the proverbial soft landing, the experts conclude.