Main Opposition parties competed with FF in making unsustainable election promises, writes Garret Fitzgerald.
REFLECTING RECENTLY on the prospects for our economy, I was reminded of a "law" I invented many years ago, to the effect that "economic forecasters generally underestimate the scale of future change, both upwards and downwards". This was true of forecasts for the Irish economy throughout the Celtic Tiger period. The ESRI came nearest to being right in those heady 1990s.
Nevertheless, even it consistently underestimated growth throughout those years. And, although its first forecast for the current year, published in April 2007, forecast a slowing of economic growth by over one-third to just under 4 per cent, since then its projection has been cut back every quarter, until today it is actually predicting a small drop in output.
The ESRI is currently expecting a 2 per cent growth in output in 2009, and its most recent medium-term review foresees the return to a more normal growth rate thereafter - albeit at a slightly lower rate than we experienced during the post-Celtic Tiger period - viz at a rate just under 4 per cent a year, as against just under 5 per cent between 2000 and 2007.
However, as I have pointed out here on several occasions, a one-fifth lower growth rate applied to a volume of national output that is now more than one-third above the level of the year 2000 would yield a larger, not a smaller, annual volume of additional resources.
But all that is now in the balance, given the credit crunch threatening to overwhelm the US economy, and which in Ireland has raised concerns about aspects of our own banking system. Quite apart from doubts on that score, there remains the question of the capacity of our Government to weather the public finance problems it created for itself by failing to address the house-building bubble before it got entirely out of hand.
INovember 2005, the ESRI recommended that the Government stop using public policy to artificially boost housing output, which was already overstretched. Such action, the institute advised, was necessary in order to minimise the risk of a hard landing for the housing construction sector.
Unhappily this advice was ignored by a Government too closely involved with the construction sector. This tie-up appears to have had the effect of turning what might have become a soft landing into a very hard one indeed. And not just for the building industry, but one carrying dangers for the rest of our economy.
Unfortunately our economy is not well equipped to cope with the damage done to our competitiveness by the inflationary policies pursued by the Government before both the 2002 and 2007 general elections.
No increase in the value of merchandise exports this year is now foreseen by the ESRI, and only a 1 per cent increase next year. Moreover the institute's recent forecast of a 10 per cent increase in the value of service exports both this year and next may prove too optimistic, for in the first quarter of this year the rate of growth of such exports was only a fraction of that achieved throughout 2007.
The Government will not find it easy to cope with this multiplicity of economic problems.
First of all, it finds itself faced with what has become a constantly moving target. Next, it is already having to deal with populist rhetoric from some ill-informed and irresponsible sections of the media, demanding that it "do something" unspecified - as well as from right-wingers calling for tax cuts that would leave us even more vulnerable to excessive borrowing than we are already.
The Opposition in the now-adjourned Dáil confined itself to castigating the Government for having aggravated our externally generated problems by its failure to tackle the housing bubble earlier, and has wisely avoided being prescriptive about the best way to deal with the crisis thus created. For, in the nature of things, only the Government and the Central Bank have sufficient information to be able to judge how best to act in this situation, and serious politicians cannot afford the kind of rhetoric that passes for journalism in some sections of the media.
The Opposition are also somewhat handicapped by their earlier failure to hold the Government to account for its past inflationary policies, both in the period before the 2002 election and during last year's irresponsible general election campaign. In that campaign both of the main Opposition parties preferred to weaken their credibility as a responsible alternative by competing with the Government in making unsustainable election promises.
When at the time of the general election I made this criticism of the Opposition's stance, the response was that the Government's reputation for economic management had been so strong that such criticism would not have been listened to. As a result, both Government and Opposition are for the moment lacking in the kind of credibility needed to command public confidence in this crisis. It may, however, be easier for the Opposition than for the Government to regain that confidence because, in its surprisingly clumsy handling of the crisis to date, the Government has clearly done itself some further damage - on top of that which it inflicted on itself by its weak performance in the Lisbon Treaty debate.
Having said that, all is not gloomy: our borrowing level is one of the lowest in Europe, and we are still attracting substantial new investment, such as that recently announced by IDA Ireland around the plans of Coca-Cola to invest in excess of $300 million in an R&D plant in Wexford. And it remains the case that if the global economy survives the pressures to which it is currently being subjected, we should emerge in 2010 from our present difficulties.
I'll be back before the end of August!