'Swingeing' Budget prompts bank to revise forecasts

THE SEVERITY of the tax increases in the Budget prompted Bank of Ireland to revise down consumer spending forecasts contained in its latest quarterly economic outlook.

Dan McLaughlin, chief economist with the bank, said he was “very surprised at the swingeing nature of the taxation measures and the extraordinary reluctance to cut capital spending”.

“In previous so-called difficult budgets in the 1970s and 1980s, current and capital spending were cut. Never before have we had a budget that reduces after-tax income for average earners by around 4 per cent and for higher earners by 8 per cent.”

In the bank’s economic outlook, published yesterday, Dr McLaughlin forecast a 7.5 per cent fall in the volume of consumer spending in 2009, a downward revision of two percentage points following the Budget.

He said it was “curious” that domestic demand was being depressed, as the fall-off in this area of the economy was one of the main contributory factors behind the recession. “If you look at exports, they are holding up quite well.

“The main fall-off is domestic demand.”

He predicts domestic demand will decline 10 per cent this year with exports falling 5 per cent. Unemployment is forecast to reach 11.8 per cent.

The economy will decline 7 per cent this year, according to the report, but Dr McLaughlin believes growth will be flat in 2010 as the global economic cycle begins to improve.

With inflation expected to average -2.7 per cent this year, the combination of time, low interest rates and falling inflation – “conditions that normally precipitate an end to a recession” – were in place internationally.

In Ireland prices look likely to continue to fall which will offer some support to real incomes, he added.

Separately yesterday, former European commissioner Peter Sutherland said the Irish economy was “not the basket case that is being presented at home and abroad”.

The country had a “major budget deficit problem” and resolving this would be painful.

However, much of the debate on the weakness of the State’s finances ignored strengths in the economy.

Ireland remained a wealthy country despite the “immediate and serious problem in our budget deficit”, he said.

Mr Sutherland also said he did not anticipate “any substantial attack” on his position as BP chairman at the company’s upcoming annual general meeting.