ESRI concerned over budget deficit timeline

Thursday 21 October 2010 22.01
ESRI - Suggests pushing deficit deadline to 2016
ESRI - Suggests pushing deficit deadline to 2016

The Economic and Social Research Institute says it is concerned that attempting to reduce the budget deficit to 3% by 2014 could tip the economy into a deflationary spiral of low growth and high unemployment.

The institute has suggested a longer timeframe for the adjustment, as it now believes the level of savings required could be double the amount previously estimated.

It also believes the Croke Park Agreement may have to be re-examined, given the scale of required savings.

In its latest quarterly economic commentary, the ESRI warns that trying to meet the 3% target by the 2014 deadline could mean the Government taking so much money out of the economy that it damages economic growth.

Speaking on RTÉ's Morning Ireland, Professor Alan Barrett, from the ESRI, said a growth rate of more than 3% per year would be needed to address unemployment.

Mr Barrett said that both increased taxes and spending cuts would have to be considered and nothing could be excluded, including the Croke Park deal.

In last December's Budget, the Government estimated an adjustment of €7.5bn would be required to meet the target.

But since then, higher bank bailout costs and lower growth prospects have pushed that figure to as much as €15bn, under the ESRI's low-growth scenario.

It says cuts of that scale would reduce annual growth rates to around 2.25%, which are not high enough to reduce unemployment and produce sufficient tax revenues for a sustainable budget deficit.

To avoid this, the institute suggests pushing the 3% deadline out to 2016.

However, the European Commission has rejected calls for the 2014 deadline to be extended.

A spokesman for EU Economics Commissioner Olli Rehn said last night that only the European Council could change the four-year target.

Cabinet to discuss Budget on bank holiday

The Cabinet is to hold a special meeting on bank holiday Monday, as well as an all-day meeting on Tuesday.

December's Budget, as well as the four-year economic plan, will be discussed.

The Taoiseach said it was not feasible for Ireland to consider looking for an extension of the 2014 deadline.

Brian Cowen said this would increase debt and debt repayments. He repeated the Government's commitment to meeting this target, saying they must and would proceed.

He said the Government had made no decisions as yet as to the level of adjustment required in the Budget.

Fine Gael leader Enda Kenny said this was a defining moment for Ireland and for its political system, warning that our sovereign independence is at risk.

The party's Finance Spokesperson, Michael Noonan said the ESRI thinks that 'somewhere over €4bn' is needed in adjustments for the upcoming Budget, whereas the Department of Finance is looking at a figure nearer to €7bn.

'It is hard to see how two respected organisations could arrive at such diametrically different figures,' Mr Noonan said.

In light of the 'big divergence' that has emerged in the figures, 'independent verification would be very important now,' Mr Noonan said.

A spokesman for the Minister for Finance stated this morning that the Department has not said cuts of €7bn are needed in the Budget.

He said the Opposition has been presented with a range of figures and options, but the Government will decide the final figure.

Economic challenges

Labour Finance Spokesperson Joan Burton said the report 'underlines the scale of the fiscal and economic challenges facing' the country.

She added: 'Rather worryingly, the ESRI expect wages and economic growth to be lower, and unemployment and emigration to be higher next year than they had expected only three months ago.

'Putting the entire focus on spending cuts and tax hikes will be ultimately self-defeating. We need a package of confidence building measures to get the economy moving again.'

Sinn Féin Finance Spokesperson Arthur Morgan said the report vindicated his party's position on reducing the deficit.

Mr Morgan said: 'This morning's Quarterly Economic Commentary by the ESRI has rubbished the Government's, Fine Gael and Labour party's target of achieving a budgetary position of 3% of GDP by 2014.

'2016 is the timeframe that Sinn Féin has been proposing for the last number of weeks and is the deadline set out in our pre-budget submission to be launched in next few weeks.'