The latest quarterly report from the Economic & Social Research Institute provides a reference point from which to judge the economic plans of the various political parties in the coming election. The independent research organisation has identified twin economic imperatives for any new administration. It warns that failure to reign in public spending and control inflation will choke off the nascent economic recovery. In that context the most important pledges that will be made by political parties over the next few weeks will arguably be targets set for public expenditure. According to the ESRI the exchequer will be €727 million in the red this year before a single cent promised in the election is spent.
The ESRI arrives at this conclusion on the basis of existing commitments made by the out going Government on health spending and infrastructure. It also assumes realistic pay increases for public sector workers. This all translates into an increase in current spending this year of 11.8 per cent. A deficit of €1.9 billion is predicted for next year on the basis of an increase in current spending of only 7.7 per cent. A shortfall of this magnitude would put the Republic at risk of breaching the European Unions rules on deficits, the ESRI has warned.
The ESRI figures invite comparison with what we know of the political parties' economic plans. To date only the Progressive Democrats and Labour have indicated their spending plans in any detail. The PDs have set a target of a 14.5 per cent increase in spending this year and 8 per cent in subsequent years. Labour has taken a more nuanced approach saying spending on the existing services will grow at the same rate as the economy, while new services and initiatives will be capped. No doubt Labour will be pinned down as the election campaign progresses, but a global target of 10 per cent per year is implied. Fine Gael's recent economic documents suggest spending increases of 9.5 per cent.
It is already clear that no party can hope to avoid the sort of deficits being predicted by the ESRI unless they can find additional sources of funds. Labour proposes to borrow and increase taxes moderately. The PDs plan to sell state assets and borrow. The wisdom of these alternative proposals will be debated over the coming weeks. The other issue highlighted by the ESRI is inflation, specifically wage inflation. If wages continue to increase at their current levels an inflationary spiral will set in, undermining exports and costing jobs. With the ESRI now joining the sceptics about a new national wage agreement the risk becomes more real every day. The consequences of failing to control public spending and inflation will be detrimental for an otherwise benign economic outlook. If these problems can be contained the economy should be growing strongly by the end of the year. Next year should see it hit the 4.5 per cent growth rate that most economists concur is its long term potential.