Wage levels too high, says Central Bank
“Ireland has done a lot over the past few years to improve competitiveness but there is still a case for lowering the cost base in the public and private sectors,” said the Central Bank’s new chief economist, Lars Frisell.
However, Mr Frisell stopped short of calling for public sector wage cuts. He said that is ultimately a decision for the Government.
“Public sector pay is a significant focus of attention. It is important that we deliver cost reductions in the public sector and that we maximise efficiencies,” said Central Bank economist John Flynn, who was also speaking at the quarterly review.
Mr Frisell said there was a “fair concern that additional measures would have to be taken” to meet the EU/IMF bailout targets because of significant downside risks to the eurozone economy.
Indeed, there was an argument to be made for “frontloading” as much of the budgetary adjustment needed between now and 2015 to rein the budget deficit within 3% of GDP.
“It is very important that the Government is not reliant on the external environment to meet targets.”
Mr Frisell acknowledged there were downside risks to his recommendations for wage cuts and greater budgetary adjustment.
According to the Central Bank’s own forecast the economy remains very weak. GNP is expected to contract by 0.4% this year and the unemployment rate is forecast to reach 14.8% by the end of the year. But there is also a mortgage arrears crisis. If there are further wage cuts, then it leads to further mortgage arrears.
Moreover, if there is greater budgetary adjustments when the economy is still very weak, then it could undermine a fragile recovery. Mr Frisell said wage cuts and budgetary adjustments would “have to be done carefully” to avoid doing further damage to the economy, although he did not outline how this could be achieved.
He noted “with some concern” the recent comments made by the German, Dutch, and Finnish finance ministers apparently ruling out a deal on legacy bank debt and only paying the current market value for stakes in existing banks.
If there was a deal on Irish bank debt as a result of ongoing negotiations with the troika, when it would enhance the economy’s debt sustainability, but it was not essential, said Mr Frisell.
More structural reforms are needed to improve competitiveness. Greater flexibility and competition is needed in the sheltered sectors such as law and medicine.
It is very important that the restructuring of the banking sector continues and that banks return to profitability in order to transmit credit to the wider economy, said Mr Frisell.
Business investment is expected to fall by 1.5% this year before growing by 1.5% in 2013.
Consumer spending is forecast to fall by 1.8% this year and make another marginal drop by 0.5% next year. Total exports are forecast to increase by 3% this year and 3.8% next year.
