Growth may not reach levels achieved at the height of the boom, butthe Economic and Social Research Institute believes a crash is out of thequestion, writes Una McCaffrey

The economists who inhabit the Economic and Social Research Institute (ESRI) have for some time now been betting their house on a "soft landing" for the economy.

Growth would not reach levels achieved at the height of the boom, they said, and unemployment would rise, but a crash was nonetheless not in prospect.

Happily for them and the rest of us, their forecasts now look to be coming to fruition.

The ESRI's latest economic commentary predicts that growth will remain beneath its potential this year and next, but will pick up towards the end of 2004 as the international economy becomes much stronger.

Unemployment will tick up according to the analysis, but the latest picture is much softer than the "very steep rise" forecast in the institute's last commentary.

This time round, the institute speaks of a "resilient" and "stable" labour market, albeit with a note of caution on the extent of part-time employment.

The 5.1 per cent unemployment rate forecast for next year, while marking a rise in the measure, still allows the Republic to compare itself favourably to the euro-zone average of 8.8 per cent.

The commentary also outlines a positive forecast for inflation, which the ESRI sees falling to 2.5 per cent next year. It points to improvements in both consumer and business confidence indicators and expansion in manufacturing output and retail sales.

Unlike the Central Bank, the ESRI is not factoring the potential for a housing crash into its growth forecasts. The think-tank expects the rate of growth in house prices to moderate towards prevailing inflation in a gradual move over coming years.

Even the management of the public finances is not coming in for the bashing it has traditionally attracted. The ESRI says the re-emergence of the Government deficit this year is not, in itself, a worrisome development.

The institute's economists expect the Exchequer will borrow €1.9 billion this year, a level which brings them in line, for once, with the Minister for Finance, who forecast the same deficit last December.

Since then, Mr McCreevy's officials have been warning that tax receipts will come in €500 million below expectations, thus implying that the deficit would expand by a similar measure.

ESRI economist Mr Danny McCoy, who edits the institute's quarterly reviews, scotched this projection at a briefing yesterday, suggesting that the actual shortfall would be about €300 million.

He furthermore predicted that Mr McCreevy would perform one of the Exchequer tricks for which he is famed and produce some revenue from somewhere to plug the hole.

Mr McCoy said it was difficult to say how this would happen, but pointed to corporation tax as the source of most uncertainty. In any case, the ESRI moots, the public finances have not deteriorated as much as they might have in the economic slowdown that has occurred. What does cause the economists some disquiet, however, is how the deficits recorded by the Government are used. Reasonably, they are anxious that all money spent and borrowed should deliver value for the public.

Chief among their concerns in this regard is benchmarking. At a cost to the economy of €1.1 billion, benchmarking payments have been controversial from the start.

Mr McCoy said yesterday that the public had been "badly served" by benchmarking, referring to the "veil of ignorance" through which most people regard the process. He believes this problem with perception will come home to roost next year, as the social partners embark once again on a round of pay talks, and all sides seek justification for the arguments that serve their own interests. The timing of these discussions is not "propitious", according to Mr McCoy. He foresees trouble ahead.

The crux of this upset will be, according to the ESRI, a timing coincidence. Just before the discussions on Sustaining Progress kick off in early 2004, the public sector will receive half of the 8.9 per cent pay rise it is due under benchmarking. In some cases, this "half" could mean a pay hike of as much as 12.5 per cent, while in others, depending on the worker, it will be almost negligible. In the eyes of many private-sector employees, however, the payments will be seen as a windfall that by far overshadows the 2 per cent they are due under Sustaining Progress.

This becomes particularly true when it is recalled that those in the public sector will also be due a 3 per cent partnership raise next January. Even though this payment has been delayed to allow for a pay pause in the second half of this year and the overall Sustaining Progress rises are equal across the economy, Mr McCoy says the perception will be one of inequality between those employed by the Government and those outside.

In other words, the wage negotiations due to begin in March could be dominated by a feeling that the private sector is being left behind while the Exchequer is milked by civil and public servants. The reality is less important than the perception, suggests Mr McCoy.

Luckily, the ESRI puts forward a possible escape clause, whereby the private sector can be convinced that benchmarking is not only justifiable but necessary.

Productivity improvements in the public sector should be verifiable and (with extra emphasis) "real", said Mr McCoy yesterday.

Referring to the Performance Verification Groups that have been established to fulfil this very mission, Mr McCoy said he was sure they would do the job "to the best of their ability", but added that it was always hard for a group of advisers to work out what was happening on the ground.

A better measure, he suggested, would be to survey the consumers of public services to gauge their views on the subject. At least then, they would perceive their opinions were of value.