Lenihan admits 'serious problem' in economy

Minister for Finance Brian Lenihan said the latest report from State think-tank the ESRI indicated that there was a serious problem in the economy.

However he said that the Government would take resolute, prudent and determined action to deal with it.

The report said the economy will experience a recession this year for the first time since 1983.

Speaking on RTÉ Radio's News At One, Mr Lenihan said the first priority would be to ensure that the country does not spend more on services that we can afford.

But he said the Government needed to invest in projects that will give a real return in the future.

Also on the programme, Fine Gael Finance Spokesman and deputy leader Richard Bruton said the ESRI report showed the Government has wasted the economic boom.

Mr Bruton accused former Minister for Finance Brian Cowen of expanding spending in the years before the last General Election on the back of an unsustainable property boom.

Today With Myles Dungan: David McWilliams, Brendan Keenan and Dan McLaughlin look at Ireland's economic prospects | Listen

Economists are warning that Government borrowing will exceed EU limits next year if public spending growth is not curtailed to historically low levels.

The massive public finance surplus, on which the Government based its election promises, will be all gone by next year.

In its latest Quarterly Commentary (read the summary version here), the ESRI forecasts that unemployment will exceed 7% of the labour force by the end of this year, and that public finances will deteriorate sharply.

This raises the prospect of a return to net emigration for the first time since the 1980s, with the numbers having to leave the country to find work exceeding those coming here by 20,000 per year.

The report includes the ESRI's fifth successive downward revision to its outlook for this year. It says the impact of declining consumption, slower exports, the building slump, and the international credit crisis have been much worse than feared.

It expects economic activity will now fall by 0.4%, and disposable income by 2.6% this year, the first annual reductions since 1983. The implications, according to the institute, are stark.

But speaking on RTÉ Radio's Morning Ireland, report co-author Dr Alan Barrett said the prospects of getting out of this recession were better than those of the 1980s.

The ESRI argues that the Government should break European rules and borrow €11bn to run the country next year. It says pay restraint must be imposed in the public sector, and it calls for State agencies to do more to help the unemployed.