ONE MEASURE of the sharp contraction of the economy is that output and incomes next year will average levels last seen in 2003-2004, the Economic and Social Research Institute (ESRI) predicts in its latest quarterly commentary. Then, the average number unemployed was 88,000 but by next year unemployment could reach 324,000 – or 15 per cent of the workforce. Ever-lengthening dole queues, as the authors of the report note, illustrate the true cost of the recession.
The ESRI agrees with the Government that €4 billion in savings must be achieved in the December budget to check an Exchequer deficit that risks spiralling out of control. It also warns that savings secured by spending cuts and tax rises – assuming the Government fully implements its fiscal package – will stabilise at best the general government deficit at 12.9 per cent of GDP in 2010. It will not, however, reduce the deficit.
In the short term, spending cuts and tax rises will deepen the recession and raise unemployment, the ESRI concedes. But without taking these tough measures, the Government cannot hope to regain control of the public finances. And that should be its priority.
The challenge facing the Government is to achieve cuts of over €2 billion in current spending in the budget. This, the ESRI says, will require savings in each of three areas: public service pay and pensions, social welfare and other spending programmes. It favours further public service pay cuts, but structured so as to limit the impact on the lower paid. It feels that “some cuts in numbers or hours” worked in the sector are also necessary. On social welfare, the ESRI favours a freeze rather than a reduction in benefit payments, while it recommends a 20 per cent cut in child benefit.
Rapid consolidation of the public finances is seen as the necessary first step on the path to economic recovery. But in the medium term the biggest challenge will be unemployment. A quick return to economic growth offers the best means of reducing the numbers unemployed and that can best be facilitated by a more competitive domestic economy. But for that to happen, the ESRI suggests, there must be a major improvement in competitiveness.
Ireland has experienced a serious loss in its ability to compete internationally since 2000. To restore that loss will involve further pay cuts to bring Irish wage levels more in line with those elsewhere. Central Bank governor Patrick Honohan, in his first public address since his appointment, acknowledged yesterday that the Irish wage trend was worrying and said that wage cuts to sustain employment and retain competitiveness were preferable to job cuts and unemployment.
Perhaps the only consolation offered by the ESRI in its bleak but realistic assessment of economic prospects is that it expects the economy to show positive growth by the second half of 2010. Irish exports should be helped by an earlier than anticipated recovery in the world economy. But by how much will also depend on how quickly competitiveness is restored.