ANALYSIS:The bulk of the 12.75 per cent deficit expected this year arises from home-grown policies

THERE WAS a bit of a barny up at the Central Bank yesterday as it was presenting its latest quarterly report.

Some of the reporters and commentators wanted to know who was to blame for getting us into this mess, but Tom O’Connell, assistant director of the bank, appeared constrained in his ability to comment.

Truth was the barney was as real as Government statements on the economy from, say, the run-up to the last general election. The reporters and commentators already knew who they blamed – the Government.

The latest quarterly report from the Central Bank indicates the bank agrees with this view.

It believes the vast bulk of the general government deficit we now have to deal with is a structural deficit. What this means is that the bulk of the 12.75 per cent Government deficit expected this year arises from home-grown policies. O’Connell put the figure at around 10 per cent.

Having been overblown just two years ago, the housing construction sector is now “closed down”, O’Connell said. This in turn has led to a sharp contraction in the economy, and has created a huge hole in the public finances.

Domestic demand is way down and household savings are shooting up as people, worried about the future, are changing their habits. In 2007 the cost of the goods and services we imported was €10.3 billion more than the value of what we exported. Next year the bank thinks the equivalent figure will be €99 million.

In the years since 2001 or so, the economy, through its banks, was on a borrowing binge. The Government rode the wave. As O’Connell pointed out, current spending by the Government grew by 72 per cent in the period since 2001.

Not only that, but “transfer payments” – pensions, dole, child benefit payments, etc – grew by 85 per cent over the same period.

Higher grades in the public sector got significant pay increases their union representatives claimed were their due when benchmarked against the private sector.

Now the bubble has burst and the economy is set to contract by 12 per cent in the period to 2010, if not more. For O’Connell the implications of this appear obvious. Living standards must fall. Everyone must take a pay cut, and those who sell goods and services must reduce their prices.

His comment also made clear he believes the Government should look at changes to “transfer payments” as well as public sector pay, the minimum wage and professional fees. Medical consultants here get paid 2½ times what their counterparts in Northern Ireland receive, he noted. Private sector pay is already adjusting to the new circumstances in non-service areas. He said he had heard of pay reductions of up to 30 per cent.

There was a lot of “froth” in the economy in recent times, and we have to get back to where we were prior to the build up of that froth, is his view. Once we’ve done that, then the economy can begin its upward climb again.

George Lee of RTÉ wanted to know how you explained it to someone on €20,000 a year that they had to take a pay cut when they’d done nothing wrong.

O’Connell said the property developers and big bankers had lost a huge amount of wealth, although he didn’t appear to have much sympathy for them. Anyway, there was no choice in the matter. There was less wealth in the economy, and so people would have to earn less.

Restoring confidence in the economy would require “firm and decisive action” by the Government in relation to the public finances, he said.

In other words, everything depends on the people who bear so much of the blame for getting us into this mess in the first place.