The medium-term review of the economy, published today by the Economic and Social Research Institute (ESRI), is largely positive. It predicts that annual growth rates should exceed five per cent for the next five years in the absence of serious economic shocks. But it contains a number of stern warnings and some unpalatable advice for the Coalition Government as it prepares to enter negotiations on a new social partnership agreement. The forecasting of the ESRI has been the most accurate available to the Government in recent years. It was the first to predict the spectacular growth of the economy and its continued buoyancy. Because of that, its advice deserves serious consideration, particularly when it warns that economic growth could be choked off - thereby damaging the general welfare of society - by inappropriate fiscal policy. In particular, it calls on the Government to cut the level of tax concessions to £100m or less over the next two years so as to counter the potential "bubble" in the housing market; to curb excessive economic growth and to allow any future economic shock to be dealt with through a counter-cyclical fiscal policy. After two years of budgetary discipline ( or when the economy slows down), the Government should be able to increase the level of tax cuts to £700 million to £800 million a year, for a couple of budgets.
The call for further restraint at this time, when the public is deluged with evidence of widespread tax evasion and fraud by some better-off sections of society, is likely to prove unpopular. And it runs directly counter to public expectations. As the Government's Budget surplus continues to soar, SIPTU has demanded £1,000 million in tax concessions as part of any new national partnership agreement, while some public-sector unions are threatening industrial action in pursuit of higher wages. In this context, it is probably impossible for the Government to implement all of the priorities listed by the ESRI. It has identified the key needs of the economy as: heavy investment in infrastructure, linked to reform of the planning and implementation process; renewal of social partnership if it deals with public-service pay and ensures a stable domestic economic environment; fiscal policy to be tightened over the next two years and the need for a comprehensive programme of tax and welfare reform to ensure a sharing of the fruits of growth.
However, it is the job of government to set priorities. It faces difficult choices in the weeks ahead. The National Development Plan - outlining State investment for the coming years - will be published shortly and the choices made in allocating resources will have important implications for our economic fortunes. The Government must also decide how to frame the December Budget, balancing the need for restraint with the demands for lower taxes and higher spending. And the threatened nurses' strike is one sign of the increasing pay expectations building in many areas of the public service.
In making its choices, the Government must bear in mind the foundations on which our economic success have been built. These include a partnership approach, where pay restraint is traded off against lower taxes and a common policy platform is agreed. In framing its investment plans, it must also deal with the problems caused by rapid growth and the need for major spending in areas such as roads, housing and public transport. Ironically, just as the success of the partnership approach has become most clearly apparent, the Government and the social partners face the most serious challenge to this strategy since its inception in 1987.