€15bn cuts ‘pose threat to economic recovery’
The ESRI warns that the pressure to slash spending and raise taxes in the time agreed with the EU Commission could seriously undermine any chance of economic recovery further down the line.
Even in the more benign scenario, the institute is forecasting employment will average 1.86m this year, down 68,000 on 2009, a decline of 3.5% while unemployment is expected to average 13.25%. Next year employment will decline to 1.85m with unemployment to rise to an average of 13.5% for the year.
In view of the huge pressure to cut the budget deficit, the quarterly bulletin warns of the real danger that the numbers out of work could stay above 10% for an indefinite period if the cuts derail the anticipated recovery set to be driven by strong export growth in the first instance and by a return to more buoyant consumer demand which remains muted.
A positive sign of encouragement is the belief that the ECB will be slow to raise interest rates in the short term with no move until 2011 at the earliest.
One of the key worries of the forecasters is consumption has continued to fall in 2010 while the pace of decline has moderated.
The outlook is for modest growth next year with consumption to pick up by just 1% having fallen by a similar amount this year.
Dealing with the cutbacks needed, the ESRI warns that, if the €15bn turns out to be the true amount that has to be deducted between now and the end of 2014, the impact could be to reduce annual growth on average over the period by 1%.
That would result in an average annual GDP of 2.25%, while the deficit by end 2014 would have fallen to between 2.5% to 3% in accordance with the EU deadline.
Summing up, the ESRI is concerned over the potential negative impact on the economy of this scale of adjustment.
Its forecasts are based on a budgetary package of €4 billion savings, but “it could well be that a higher amount will be sought”.
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