ESRI: €15bn cuts may prolong recession

IMPOSING €15 billion of cutbacks to get the deficit under control by 2014 could tip the economy into a “protracted recession”, the ESRI has warned.

It also said the Croke Park agreement on public service pay and pensions might have to be ripped up as the state grapples with the massive black hole in its finances.

The warning came as Government efforts to seek a consensus with the opposition on budgetary strategy ended in failure last night.

Taoiseach Brian Cowen and Greens leader John Gormley met with their Fine Gael and Labour counterparts, Enda Kenny and Eamon Gilmore, in Government Buildings.

But the two-and-a-quarter hours of talks failed to achieve anything other than what had been agreed prior to the meeting – the commitment by all sides to the target of reducing the deficit to 3% of GDP by 2014.

The Government and main opposition parties believe setting that target is crucial in order to reassure the markets, reduce borrowing costs and fend off the IMF. Brussels is also demanding such a timeline be met in order to comply with EU deficit rules.

However, the ESRI has warned it could be a devastating mistake to try to do too much too quickly.

In its latest review published today, the country’s leading economic think-tank says it could require up to €15bn of cutbacks spread over the next four budgets to reach the 3% target.

That is twice the sum envisaged by the Government in last December’s budget – and the ESRI believes implementing that amount of cuts over the next four years could tip the country into a protracted recession.

“We have grave doubts over the wisdom of the parameters of an austerity programme where such a high level of savings will be sought in such a timeframe,” said co-author Alan Barrett.

The ESRI believes that negotiating an extension of the deadline with Brussels would not necessarily further damage Ireland’s credibility, as many experts are already sceptical that the 2014 deadline can be met.

Sinn Féin, the only Dáil party to reject the deadline – and who were not invited to the talks in Government Buildings as a result – reiterated its view that the target date should be 2016.

The talks between the Taoiseach, Mr Gormley, Mr Kenny and Mr Gilmore began at 4pm. They broke up at 6.15pm when it was clear the parties would be unable to reach consensus on the specifics of budgetary strategy.

Speaking afterwards, Mr Kenny said Ireland “needs a recovery plan and not just an austerity plan” and the only way that a mandate could be secured to implement a recovery plan was through a general election.

Mr Gilmore said there had been differences between his party and the Government and Labour had always believed talk of a consensus was unrealistic.

The break-up of the talks appeared a personal failure for Mr Gormley, who had pushed the idea of consensus when it appeared Mr Cowen was also sceptical of the idea. But Mr Gormley insisted last night that his proposal had neither been a political stunt nor naive.