THE IRISH economy has hit hard times. The evidence now is incontrovertible. From virtually every point on the economic compass, the news is bad. Economic growth is evaporating, unemployment is rising, consumer sentiment is weakening, the public finances are falling deeper into the red.
The Exchequer Returns, published yesterday, show that taxes have fallen almost €1.2 billion below budget targets in the first five months of 2008. Early in the year, the tax shortfalls were most pronounced in construction-related taxes such as stamp duties and Capital Gains Tax. Now, the locus of weakness in tax revenues has shifted to spending taxes, principally Value Added Tax (VAT). VAT receipts in the first five months of this year were almost €600 million or 8 per cent below official expectations.
These trends indicate that the initial downturn in the construction sector is now spilling over into consumer spending, the largest component of the domestic economy. Consumers have grown apprehensive, assailed by fears of unemployment, besieged on all sides by price rises, threatened by increases in mortgage interest rates. When consumers lose confidence, they grow more careful in their spending.
However, a steeply declining construction sector combined with more cautious consumers is pushing the domestic economy to the edge of recession. The Organisation for Economic Co-Operation and Development (OECD) forecast yesterday that the volume of domestic demand would fall this year. The domestic boom, which has sustained the economy virtually since the start of the century, has finally been punctured.
Moreover, even where activity is stalling, inflation is accelerating. The Paris-based think tank is projecting that the average level of prices - excluding mortgage interest - will increase by 3.4 per cent this year.
The numbers out of work have risen steeply in the first four months of this year and the OECD envisages that this trend will continue. It forecasts that the unemployment rate will climb from 4.5 per cent of the labour force last year to 5.7 per cent in 2008 before increasing again to 6.5 per cent in 2009.
The swift change in the country's fortunes is difficult to absorb both because the turnaround has been so sudden and because times were so good for so long. However, it is both fruitless to live in the past and imperative to face the present if the country is to prosper in the future. The first step on the road to a sustained recovery is a change in expectations.
For a year or two, it will be necessary for all to lower their sights in terms of additions to their living standards. This holds not only for wage restraint on the shop floor but for executive bonuses in the boardroom. It also holds for those who make excessive demands from the State, expecting much in terms of services but paying relatively little by way of taxes.
The sooner the reality of Ireland's changed circumstances can be accepted by all in the community, the quicker the current economic difficulties - many of them temporary - can be surmounted.