The Government has been warned to control spending in the run-up to next year's election by the Economic and Social Research Institute, writes Marc Coleman, Economics Editor
In its latest commentary on the economy, the ESRI says strong rises in spending are putting inflationary pressure on the economy.
"Our conclusion is that if there's a pre-election binge, it will be inflationary," the ESRI's senior research officer, Dr Alan Barrett, said. "That means we're losing competitiveness, that means it is becoming more costly to do business."
The institute predicts the economy will grow by 5 per cent this year and next, but says that it is increasingly at risk from the housing market and deteriorating competitiveness. It has also warned that the economy is over-reliant on growth in day-to-day spending by consumers. It predicts domestic consumption will grow by 5.9 per cent this year and by 6.4 per cent next year as special savings incentive accounts mature, and will remain the driving force of the economy.
Dr Barrett called on the Government to avoid inflationary increases in public spending. "We are also expecting Government expenditure to rise in the run-up to the general election, although we warn against this," he said. Referring to tax cuts promised at the weekend by the Progressive Democrats should they remain in government after the next election, Dr Barrett said that tax cuts could also contribute to inflation unless they were compensated by simultaneous cutbacks in public expenditure.
According to the ESRI commentary, inflation and falling competitiveness contributed to low growth in exports last year. In annual terms, exports grew by 1.8 per cent last year, a rate which the ESRI says compares unfavourably with global trends. "World trade grew by over 6 per cent in 2005 so Ireland continues to lose market share in world exports. We forecast an improvement in Ireland's export performance with growth rates of 3.5 per cent in 2006 and 4 per cent in 2007. However, the growth in Ireland's exports is forecast to continue to be below the growth in world exports."
ESRI researcher Yvonne McCarthy said an additional 67,000 jobs would be created in the economy this year. However she warned that employment growth was overdependent on the construction sector, and that growth in job creation was set to slow over the coming year. "The rate of employment growth appears to be slowing," Ms McCarthy said. "Our forecasts are for 3.4 per cent and 3 per cent growth in 2006 and 2007 respectively."
Dr Barrett said that recent evidence on inflation was causing the ESRI to become more pessimistic about inflation and to revise upwards its inflation forecast for the year. "We had forecast 2.8 per cent," he said, "but we would see it more around 3 per cent now."
An acceleration in house price growth since last year, despite higher interest rates, raised the risk of a correction in the property market, he added. "Interest rate increases should, if anything, be lowering house prices and not increasing them. It is impossible not to conclude that the probability of a bubble has increased. We feel obliged to add our voice to those expressing concern on this issue."
Were it to happen, a fall in house prices could possibly exceed 15 per cent, he said.
According to a study conducted last year by the Organisation for Economic Co-operation and Development, the housing market here was overvalued by 15 per cent in that year.