ESRI: More spending cuts needed

There still has to be a significant cut to public expenditure, which may have to include further job losses across the public sector even if the Government is successful in securing a deal on the bank debt, according to the ESRI Quarterly Economic Commentary.

The institute is forecasting that GDP will increase by 1.8% this year and by 2.1% in 2013, while GNP will contract by 0.2% this year before posting a 0.7% increase in 2013.

If the Government is to meet expenditure targets set by the troika, then another voluntary redundancy scheme may have to be looked at in the public sector.

“But if there is a reduction in numbers, then there will have to be an increase in productivity to maintain the same level of services,” says ESRI economist Joe Durkan.

But overall, “significant cuts are still required,” particularly across the big spending departments such as health, welfare and education, given that a fiscal adjustment of €3.8bn is needed in Budget 2013.

The economy will continue to struggle this year on the back of a 2.3% fall in household expenditure; a total investment decrease of 5.4% and a government expenditure drop of 2.2%.

But the public finances need to be stabilised, “so that the public finance contraction is not weighing on the economy,” said ESRI economist David Duffy.

“Once the deficit is eliminated, the economy can resume its normal growth path.”

During the economic boom years, 45% of income earners were taken out of the tax net and the economy became far too reliant on property tax revenues. “The tax base is too narrow and needs to be reversed to provide adequate services to the population,” he said.

The personal savings rate was 5.4% of GDP at the end of 2011. “This was much lower than expected se we are not going to see a pick up in domestic consumption by a decrease in precautionary savings because savings are lower than expected.”

The projected pick up in 2013 growth is based on a higher rate of investment. The ESRI sees higher rates of investment on the back of continued robust levels of foreign direct investment flows; the €2bn Nama investment to complete residential and commercial property projects to 2016 and, the €2.25bn government investment stimulus announced in July.