THE ECONOMIC and Social Research Institute (ESRI) in its latest quarterly economic commentary strikes a note of cautious optimism about the recovery prospects of the domestic economy. Although it anticipates a zero rate of GNP growth in 2010, the annual figure masks positive growth that is expected to begin later this year. This should lead to a rise of close to 3 per cent in 2011 which would mark a return to export-led growth assuming – as most international forecasts now suggest – a stronger world economy materialises next year, raising external demand for Irish goods and services.
For the ESRI to make detailed forecasts when faced with so much economic and financial uncertainty on so many different fronts presents a formidable challenge. The forecasters assume the Government will implement €3 billion in tax rises and spending cuts next year, thereby reducing the General Government Deficit (GGD) by up to 2 percentage points of GDP.
The institute acknowledges the real costs of the tough fiscal consolidation measures that the Government is pursuing and their impact on the wider economy in the form of a reduced growth rate, a lower level of employment and increased emigration. Nevertheless, it says that “such measures are necessary to ensure the medium-term sustainability of the public finances”.
And it cites the Greek experience as a salutary reminder of the importance of a strong commitment to fiscal sustainability. For, as we have seen, Greece’s lack of a credible fiscal strategy has eroded investor confidence, pushed up its borrowing costs and led euro-zone members and the International Monetary Fund (IMF) to provide emergency loan facilities to help the country avoid a default on its debt. This is in marked contrast to the positive response from international investors to Ireland’s efforts to achieve fiscal consolidation by adopting very tough budgetary measures which has been reflected in a decline in the State’s borrowing costs.
The ESRI now estimates that €25 billion will be the “possible” net cost to the State of recapitalising Irish banks, most of it to sustain Anglo Irish Bank. This will involve a large addition to the national debt although the ESRI says the amount involved is a manageable one and will not threaten the State’s solvency. But, as it also points out, the situation in which Irish taxpayers now find themselves, faced with a huge financial burden due to the behaviour of the private sector, is one that never should have arisen.