Child benefit payments should be cut by a fifth and public sector salaries cut in December’s budget, the Economic and Social Research Institute has said.
But the institute advised against calls in the McCarthy report for all welfare payments to be cut by 5 per cent to save money.
In its quarterly economic bulletin, the ESRI said the Government’s plans for savings worth €4 billion in the 2010 budget will stabilise the deficit, but it will still be more than four times above levels allowed by the EU, the report said.
Even if the austerity steps are enacted, the institute said the deficit will reach 12.8 per cent of gross domestic product next year, compared with the 12.9 per cent forecast for 2009 and the European Union's limit of 3 per cent.
Gross government debt will rise to 75.7 per cent of GDP next year from just 25 per cent in 2007 at the end of the boom.
The National Asset Management Agency, which is set to pay €54 billion for banks' risky commercial property loans, is set to increase debt by a further 33 per cent of GDP to close to 110 per cent, the ESRI said.
Ireland's net debt will rise by less due to the corresponding assets taken over from the banks.
The ESRI said it expected GDP to contract 7.2 per cent in 2009 and by 1.1 per cent in 2010. "Underlying these annual forecasts is a quarterly profile in which we expect growth to return in the latter part of 2010, although at a very modest pace," it said.
ESRI forecasts unemployment will peak at almost 15 per cent next year with a gradual turnaround in the economy expected by the end of 2010. But economist Dr Alan Barrett warned the Government must make €4 billion in savings, with the focus on public spending.
“While tax increases will have to form part of the Budget package, the balance of adjustment should be made on current expenditure,” Dr Barrett said.
He gave a more upbeat prediction on the country’s employment prospects, revising upward its summer forecast which predicted the jobless rate would soar to more than 16 per cent next year.
“Underlying these annual forecasts is a quarterly profile in which we expect growth to return in the latter part of 2010, although at a very modest pace,” he said. “On employment, we are somewhat more optimistic now than when writing in July.”
Latest official figures reveal the numbers applying for unemployment benefits fell last month for the first time in almost two years, with the rate at 12.6 per cent.
Dr Barrett said the numbers in work would average 1.85 million next year, up from 1.82 million forecast in the ESRI’s summer commentary.
He said the economy would shrink 7.2 per cent this year and 1.1 per cent next year.
The economist also forecast the general Government debt would hit 76 per cent of Gross Domestic Product in 2010.