ESRI casts doubt on ‘validity’ of spending rule

The institute said it anticipates that the economy will grow next year

ESRI research professor Kieran McQuinn said more attention needs to be focused on the validity of the spending rule as opposed to requiring the Government to 'rigidly stick' to it.

The criticism directed at the Government for breaching its 5% spending rule in the October budget is misguided in the current economic environment, the Economic and Social Research Institute (ESRI) has suggested.

The think-tank made the comments after the budgetary watchdog criticised the Government last week for overspending amid inflationary pressures.

ESRI research professor Kieran McQuinn said more attention needs to be focused on the validity of the spending rule as opposed to requiring the Government to “rigidly stick” to it.

The 5% expenditure rule is based on 3% economic growth and 2% growth in terms of inflation. Mr McQuinn argued that the economy has been growing between 4% and 4.5% over the last decade and inflation has been well above 2% over the last two years.

During its quarterly economic statement, the ESRI also indicated that Ireland’s current economic model is not broken, despite a slowdown this year.

Mr McQuinn said that while a contraction in GDP this year technically puts the economy in recession, “the underlying performance in the economy is still strong”.

“When you look at tax receipts and the labour market, that does point to an economy that is still performing robustly,” he said.

Vulnerabilities

However, Ireland’s open economy remains exposed to vulnerabilities in international markets, which resulted in falling exports this year.

The multinational sector was hit by global retrenchment in tech, but this recovered in the second half of the year, according to the ESRI report. Computer services accounted for 31% of all exports, and this category has continued to grow rapidly in 2023 on a year-on-year basis. The report said this is a welcome development “given the general difficulties in the IT sector globally at the start of 2023”.

Meanwhile, pharma exports suffered this year after outperforming during the pandemic. Pharmaceutical exports are down 6% on a year-on-year basis for the first three quarters of the year. However, they recovered some ground towards the end of the year.

There are “good reasons to believe that is a temporary blip”, said ESRI associate research professor Conor O’Toole.

Overall, the ESRI said it anticipates the economy to grow next year and the “big shock we’ve seen for this year to be a one-off”, said Mr O’Toole. The organisation said it expects real earnings to rise this year after suffering declines for over a year amid inflation which is not set to put any added pressure on the economy, according to Mr McQuinn.

The ESRI warned that the economy is still at risk due to dropping investment levels, which is hitting areas including commercial property. However, domestic banks are less exposed, as most of the commercial liability is with foreign institutions.

The ESRI also revised its inflation forecast upwards to 6.4% in 2023 before falling to a still-elevated rate of 2.9% next year. Inflation in the area of non-energy-related items has proven stubborn, especially when it comes to food and non-alcoholic beverages, recreation, and culture, as well as restaurants and hotels, said the report.