THE Irish economy will contract at a significantly faster pace this year than originally estimated, the Central Bank said yesterday.
Revised forecasts from the Central Bank now suggest that gross domestic product (GDP) will fall by as much as 7% this year, instead of the 4.7% the bank initially predicted back in January.
In total, the bank’s latest forecast for the three years from 2008 is for a 12% contraction in the economy. Next year alone, it added, is likely to see a further 3% fall in GDP.
“This is in line with the experience of other countries that have faced similar corrections in the past,” the bank said yesterday at the launch of its second quarterly economic bulletin of the year.
It said the marked change in its outlook “reflects the fact that the domestic drivers of the downturn are now being significantly exacerbated by a highly synchronised contraction in demand and output across the global economy.”
The forecast did, however, include “a moderate” sign of recovery in the global economy as a whole next year.
With regard to next Tuesday’s do-or-die budget, Central Bank assistant director general, Tom O’Connell said that the Government needs to strike “an appropriate balance” between spending reductions, tax increases and user charges for public services to be really effective.
He said: “International evidence is that expenditure-based consolidations are more likely to be successful than ones which are predominantly tax-based.
“Given the scale of the correction required, it is accepted that significant action will be necessary in regard to both Government expenditure and revenue. On the revenue side, an increase in tax rates combined with a broadening of the tax base is required.
“In the interests of raising revenue and limiting demand, consideration also needs to be given to charges for public services that are delivered free at present,” according to Mr O’Connell.
The bank said it is “imperative” that the budget deficit is returned to “a stable path” and important that this year’s deficit is “as close as possible” to 9.5% of GDP. The Government’s target is 3% by 2013.
“Something needs to be done, otherwise it could widen to 13%,” added Mr O’Connell.
Yesterday’s quarterly update also included the forecast that inflation is likely to climb 0.2% next year.
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