International forecasts

 

THE INTERNATIONAL Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) yesterday published forecasts for the Irish economy that are more pessimistic than those made by the Government last April when presenting its emergency budget. Both international organisations now see the domestic economy contracting more sharply in 2009 – by 10 per cent – than the Minister for Finance envisaged just months ago. And both also see a wider gap between revenue and spending emerging by year-end, with a budget deficit closer to 12 per cent – somewhat higher than the estimate made on budget day.

A measure of the severity of Ireland’s economic difficulties can be gleaned from a comparison with the performance of the global economy. According to the OECD, the world’s most industrialised countries will see their economies shrink by 4 per cent this year, before returning to modest growth in 2010. In contrast, the Irish economy will contract more rapidly, and recover more slowly. And the adjustment measures required to correct the large internal imbalances in the economy will also be more painful and of longer duration.

Both the IMF and the OECD share a similar analysis of the difficulties facing the Irish economy and prescribe a broadly similar set of solutions. The IMF’s bleak assessment is that a reduction in the large fiscal deficit is essential for a return to economic growth. Its executive board accepts that “ the focus should be on expenditure reduction, possibly including a further reduction in the public sector wage bill”. While the OECD is as direct, it says: “substantial spending cuts and increases in taxation are required in the coming years”, given the sharp deterioration in the public finances.

For Minister for Finance Brian Lenihan, who already accepts that the burden of fiscal adjustment requires a greater reliance on spending cuts than on tax rises, the tough advice offered by both international organisations underlines the difficult choices he faces in preparing the 2010 budget.

Mr Lenihan, in his response to the IMF’s assessment of the Irish economy, finds himself in agreement with much of what its executive board has to say. On the matter of fiscal adjustments he heeds the advice given and again acknowledges, “the focus must be more on expenditure than on taxation”. Mr Lenihan also welcomes what he describes as IMF endorsement of the Government’s decision to set up the National Asset Management Agency (Nama).

The IMF’s support is, however, qualified with caution and expresses a measure of concern about how Nama might best operate. Nama, it suggests, should be well designed, and introduced quickly. The IMF, however, also advises the Government to consider “risk-sharing structures” to help deal with the difficulties involved in pricing distressed assets.

It is important to stress, however, that the IMF has also commended the Government for “the scale and speed” of its response so far in dealing with the global economic and financial crisis. It supports many of the Government’s difficult measures which have brought it opprobrium in the recent elections. The budget in December will test the Government’s will and resolve in that regard.