WILL IRELAND be hit by a deflation death spiral? Fearing further shrinkages in his sector, Retail Ireland director Torlach Denihan clearly subscribes to the idea that cutting your way out of recession is a contradiction in terms.

In his view, the latest retail sales data suggests the tax hikes in April’s supplementary budget prompted an unwelcome spendthrift reaction from consumers, even though many workers won’t have felt the impact of the budget until their end-of-May pay packets.

If further tax hikes mean the only kind of shopping that gets done is window shopping, it will cost another 25,000 jobs in the retail sector, Denihan posited.

This will add to the exchequer’s woes in the form of higher social welfare payments and lost tax receipts, which then necessitates further tax hikes . . . and so the vicious circle continues.

It may be a private-sector interest group, but Retail Ireland’s argument employs the same logic as the one made by public-sector unions in the wake of proposals in the McCarthy report to wipe 17,000 public- sector jobs off the State’s books.

These redundancies, it is argued, will further reduce consumer spending – which is already forecast to decline by as much as 9 per cent in 2009 – and have a knock-on effect on the lengthening dole queues.

Part of the counter-argument is that a period of deflation is simply the inevitable consequence of the unsustainably large bubble that was blown in the property sector, in public-sector recruitment and in the debt-fuelled retail sector.

Yesterday, NCB economist Brian Devine made this stark note: “We do not see the 2007 peak level of retail sales being reached again until around 2017.”

Meanwhile, the Economic and Social Research Institute (ESRI) has noted the fall in consumer spending this year will be greater than expected drops in disposable incomes – indicating that consumers will start to save like they’ve never saved before.

The axing of 17,000 public- sector jobs may never happen, but the uncertainty of future pain could spur jumpy consumers to shun shops and hoard their cash.