Economist backs strategic bank call

LEADING economist Jim Power has supported the call for a Strategic Investment Bank in order to free up credit for the small business community.

The Government advisory body, the National Economic and Social Council (NESC) suggested the establishment of such a bank earlier this week, saying it would be “a key step” towards providing finance for business.

Speaking at the launch of the latest Friends First quarterly economic outlook, Mr Power said the move would be “essential” as bank credit is likely to remain scarce, adding that the Government “should be looking very closely at the NESC’s suggestions”.

In his latest economic outlook, Mr Power said the Irish economy is “being starved of credit” and no pick-up in consumer spending is likely for at least another 18 months.

He forecast a 0.8% drop in the economy in GDP terms this year, to be followed by a 1.9% increase in 2012.

Consumer spending should fall by 2% this year, he added, and the unemployment rate is likely to widen to 14% by the end of 2011, before declining slightly to 13.8% next year.

Mr Power also forecast the European Central Bank is likely to issue one more 0.25% interest rate hike before the end of this year, but said no further increases after that should be expected for the foreseeable future.

“Anything more than that would be overkill, given the current economic climate,” he said.

Mr Power also said the Government must address certain key areas to re-model the economy, including reducing bureaucracy levels and lowering commercial rates and cutting the number of local authorities.

“Ireland has a fundamentally unsustainable fiscal position — too much money is spent on running the country, with too little taken in taxation.

“The Irish banking system isn’t performing its role as an intermediary that channels capital from those who want to save, to those who want to borrow for investment or working capital purposes,” he said.

He said the Government’s proposed new property tax is a step in the right direction, as the Government needs to widen its tax base.