Budgeting for Fiscal Stability: Belt tightening and cut backs the reality for the next decade - Jim Power
Latets Economic Outlook Highlights
- House prices set to fall by further 8% in 2012
- GDP to expand by 1.4 per cent in 2012
- GNP to contract by 0.3 per cent in 2012
- Unemployment rate likely to average 14.3% in 2011 and 14.1% in 2012
Belt tightening and further cutbacks are the dual realities facing virtually every Irish citizen for the best part of a decade, Jim Power, Chief Economist, Friends First said on the publication of his pre-Budget Quarterly Economic Outlook, in Dublin today. However, he said Ireland has made progress and the Government must remain resolute and continue on its current fiscal path.
“Very skilful and innovative thinking will be required to pull the economy out of its current morass. The quality of the labour force and the ability to attract and retain highly skilled workers will be a key determinant of Ireland’s success or failure. However external global factors which we cannot control will also dictate the pace of Ireland’s recovery,” warned Mr Power, Friends First economist.
“The Minister for Finance must remain steadfast in his commitment to get our economy back on track. Borrowing must be brought under control to stabilise debt levels. Choices will have to be made, while recognising that whatever measures might be taken may damage employment, the imperative is to introduce measures which are the least damaging to employment. In this regard, a VAT rate increase is preferable to an increase in income tax, which would be more damaging to employment,” he added.
On the Euro zone crisis, Mr Power said Ireland is powerless to influence this process –however he warned that a contingency plan is necessary in the event of the system falling apart. “Ireland will not influence the solution to the European crisis, so in the meantime we should keep the head down and proceed with hast to get our public finances out of their unsustainable position.” He also warns that Government cannot be deterred by vested interest groups from its current course.
Government priorities on this course must include;
- Creation of a sustainable public finance situation
- Re-establishment of a functioning banking system
- Re-establishing a competitive economy
- Restoring public confidence
- Supporting the protection and creation of jobs
- Restoring Ireland’s international reputation
“While the export recovery is good news, this growth has been driven by higher productivity and cost cutting, rather than employment creation. A recovery in domestic demand is essential for employment creation and stronger public finances. Until adequate credit flow returns to the business sector, investment will remain weak. The programme for government commitment to set up a Strategic Investment Bank seems to have receded, but such an entity is desperately needed to target and support the credit-starved SME sector. Ireland badly needs an ICC type bank.”
According to Mr Power, greater fiscal federalism, imposed from the centre, will be the new reality - if the Germans agree to bail Europe out of its current chaos. If a rescue is not forthcoming, we need a contingency plan – which could involve a re-establishment of the sterling link, or link-in with a hard or soft euro bloc which may evolve.
However the real impediment to recovery is the Irish consumer – without domestic demand, a more broadly based recovery is unlikely. “Consumers remain very concerned about future employment prospects, downward pressures on earnings, mortgage and other personal debt difficulties and the ongoing fiscal adjustment. This fragile confidence has been seriously eroded by the euro zone crisis.
Against this backdrop the Minister for Finance must remain on course. According to the Friends First Economist, the challenge is to maintain the course of correction and to deliver cuts of €3.8 billion without destabilising the engines of recovery such as the multinational sector, indigenous agri-food sector, the tourism sector and SME’s.
“While fiscal adjustment is always going to be painful by definition, there are good and not so good ways of doing it. If targeted properly, the fiscal adjustment can be less damaging and negative from an economic and social perspective. The quality of expenditure cuts and tax increases is more important than quantity.”
