The harsh reality we now face is down to two major errors in Government policy, writes Garret FitzGerald
LAST TUESDAY'S ESRI report has come as a shock to most people. I think that while there was already a general recognition that we faced serious economic problems, few were prepared for talk of recession and renewed emigration.
Barely five weeks have elapsed since the Institute published its Medium-Term Review covering the years to 2015 - a period in respect of which its projections were on the whole encouraging, and I suspect that many people may have had difficulty in reconciling these two time-differentiated scenarios - although in reality they fit together quite well. For, although the two years immediately ahead are likely to be quite traumatic, nevertheless, provided, of course, that the world economy does not implode in the meantime, we are likely by 2010 to be recovering from the present dramatic downturn.
The shock effect of this latest ESRI report on our immediate prospects reflects the rapidity with which our short-term prospects have deteriorated during the past 12 months or so. In April last year the ESRI projected a growth rate of 4.5 per cent year in the current year, with investment growing by about 2.5 per cent. Now it foresees an actual decline in national output, with investment falling by an astonishing 15 per cent within 12 months! Within the same period the Central Bank has also had to make similar drastic adjustments to its projections.
In its second-last Medium-Term Review of four years ago the ESRI was already alert to the danger that a disruptive fall in the dollar, in or around the year 2007, might coincide with the completion of a gradual decline in house completions to under 40,000 dwellings by 2009.
But that 2005 Medium-Term Review assumption that such a decline in the number of dwellings would be gradual, spread over the three-year period from 2006 to 2009, has proved over-optimistic. Instead, construction of dwellings first of all jumped to over 90,000, and, after a small dip in 2007, is this year halving to less than 40,000, with a likely further fall to 30,000 next year. It is because of the unforeseen speed of this correction that the institute now sees overall national output actually declining this year, instead of still rising slightly, and this could push unemployment up to over 7 per cent by the end of the year.
In its recommendations for Government action, the institute firmly rejects cuts in public investment, which the Minister for Finance may be under pressure from his department to initiate according to recent statements by him.However, it does accept that projects should be prioritised by reference to their projected economic and social return - and that "in the interest of future prosperity" all capital projects should be justified on a cost/benefit basis.
This could mean that where the Government has recently chosen to ignore that cost/benefit criterion because of local political pressure, (as I know to have been the case at least once), it should now review that decision.
And in this recession it should certainly also look again at the extravagant commitment to duplicate the Metro North line from Stephen's Green to O'Connell Street with a street-level Luas line that would impact negatively upon the 60 per cent of Dublin buses that pass through College Green. I find it hard to believe that any cost/ benefit analysis could have found that the extra revenue from adding this parallel line would provide a worthwhile return.
Perhaps the most alarming feature of this ESRI report is its prediction that in 2009 we may see the re-emergence of net emigration. This suggestion derives from the institute's expectation that between the first and last quarter of this year, unemployment will increase by one half - from 4.7 per cent to 7.2 per cent, with a further slight increase in 2009.
The unknown factor, of course, is to what extent the employment situation of Irish workers may be cushioned by an outflow of eastern European workers, either to Britain or back to their home countries, where economic growth rates currently range from 5.55 to over 7 per cent.
As to our finances, on present trends the general Government deficit is likely next year to approach 4 per cent of GDP - well beyond the 3 per cent current deficit limit to which, with other euro zone states, we have committed ourselves. If we are to leave room for the indexation of welfare payments so as to protect the living standards of many less well off people, to keep the deficit down to 3.9 per cent next year will, the ESRI believes, require "a very significant tightening of the fiscal stance", involving a reduction of over two-thirds in last year's growth in such spending.
This clearly leaves virtually no room for increases in the pay of public servants, who enjoy the security of employment that so many in the private sector lack, leaving them vulnerable to redundancy. The public service unions might, however, try to secure some rate increases so as to protect the purchasing power of the wages of low-paid workers in the public sector.
This is the harsh reality of where we now find ourselves, largely because of two major errors in Government policy in recent years.
The first of these was the grave damage done to our competitiveness early in this decade when Charlie McCreevy doubled our inflation rate by increasing our current public expenditure bill by half within a three-year period - with little to show for this extravagance in terms of improved public services.
The second Government mistake was the failure to curb the house building boom before it wrecked our economy. This error may have reflected an unhealthily close relationship between our principal Government party and the construction sector.
Two self-inflicted blows, from which it will take us at least two years to recover.