ESRI’s blunt options for an economy that is off the rails
On the public finances, the general Government deficit will be 6.95% this year against the EU requirement of 3%. As the economy goes deeper into recession, next year this figure will climb to more than 10%.
Also of particular concern is the expansion of the general Government debt. In 2009 that is now forecast to hit 47.5% of GDP, up from 24.8% in 2007.
Pat McArdle of Ulster Bank said last week that a 4% decline in the economy next year would result in an 8.75% budget deficit. That means the Government will have to borrow at least €16 billion next year and that the national finances will be €3.5bn worse than the budget day figure of just two months ago, he said.
That’s a measure of how rapidly this economy is getting out of hand.
For those with long memories, this measure of the nation’s financial health was one of the major worries back in the 1980s, when the debt/GDP ratio climbed to 140%.
Critics then argued we were mortgaging the future of our children and our grandchildren. The situation had to be brought to a halt, and severe cutbacks in health and other services were introduced to restore balance to the budget.
It was a point highlighted at the news conference held by the ESRI when the grim outlook for 2009 was presented by Alan Barrett, the economist responsible for the overall analysis.
In the years following the 1980s, “debt constrained us from taking part in global growth,” he said.
As far as the ESRI is concerned, there is little wriggle room available to the Government when average employment will fall by nearly 120,000 next year compared to a decline in 2008 of less than 20,000.
In its report, the ESRI referred to a number of issues that are not going to go away in the short term. Due to the slump in property and a total loss of confidence by consumers in the economic outlook it says the State will have to face the inevitability of raising taxes.
The problem now is that this economy is, for the first time in years, spending more money than it is bringing in though taxation. As the economy slows further that situation will get worse.
“Wage cuts in the public sector should now be on the agenda,” Barrett said, as new studies show that public sector pay is 20% higher than in private and has been increasing over the past decade.
Such a suggestion a few years ago would be “revolutionary,” but not any more.
With the slowdown precipitated largely by the collapse in housing, the difficulty facing the Government is that the tax windfalls from the boom are no longer available, which means a permanent gap is emerging between the State’s total tax take and total spending.
Faced with the current situation, the basic difficulty is that the gap between income and spending will continue to expand if we keep spending.
Right now, money has to be saved and already it has been suggested that withholding increments in the public sector would lop €250m off the state’s wage bill in a year.
The ESRI’s analysis was as forthright a document as we have seen on the economy. In the end, it made a few undeniable points that have to be taken up by the social partners.
With income tax falling like a stone, it reaches some hard conclusions. It says bluntly that the 3.5% pay increase due in 2009 “appears unaffordable”. It is often over-looked that close to half of current spending in the Budget goes on wages and pensions for those who have secure jobs.
Savings should also be looked at in the national development plan, with projects with low returns weeded out to save on spending.
Cutting public pay is not the only option open to the Government. It could increase each of the tax bands by 2%, spreading the pain across all sectors.
Several commentators have talked about finding “a balance” between cutting spending on the one hand and injecting demand into the economy on the other.
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