Economy gets mixed reception from EU mandarins

IRELAND’S budget plans are in line with the EU’s Growth and Stability Pact but inflation, wages and social welfare spending all need to be kept in check, the European Commission has warned.

The pact is designed to protect the stability of the euro. It has come under pressure from several countries in recent months but was described as untouchable by Monetary Affairs Commissioner Pedro Solbes yesterday.

However, a senior economist with the Economic and Social Research Institute warned that while Ireland is implementing policies to keep to the pact, they may not be the right policies for the economy.

The report blames Finance Minister Charlie McCreevy’s budget of 2002 for the deficit of about 1% of GDP which it says went against the Commission’s recommendation at the time and for which Ireland received a warning.

The deficit is expected to be 0.7% of GDP this year, increasing to 1.2% in 2004 and 2005 though adjusted to take into account short-term factors such as recession the deficit should decline by 0.5% in 2003.

On growth it predicts a return by 2005 to a rate of 5% of GDP and says this should continue in the medium term. However, it warned the projected fall in inflation to 3.5% in 2004 from an expected high of 4.8% this year is essential to ensure price stability and competitiveness, and said that wage restraint was essential.

The debt ratio, which is the second lowest in the EU, will rise marginally to 35% by the end of 2005 from 24.1% in 2002. The report notes this is due to funding the National Pension Reserve Fund.

However, ESRI economist Danny McCoy said he believed inflation was under control and there was a danger of deflation. This could affect jobs at a time of decreasing demand for goods and decrease the value of property.

“Inflation at its current rates will not persist because you can see reality coming into the economy,” said Mr McCoy.

“So while the Government policies might be keeping us in line with the Growth and Stability Pact they may not be the right measures for the present contracting economy,” he said.

The Commission report noted the Government is setting aside increasingly large sums of money for unforeseen developments but if this money is not needed it would improve the 2004-05 budget figures.

The low surplus forecast by the Government is also partly due to its heavy programme of public investment, especially in the National Development Plan.

It concludes the long-term health of the public finances should be good given the low level of debt, the young population and the provision made for funding the national pensions.