The ESRI note provides a basis for optimism and something to work towards, writes COLM KEENA
THE 12-PAGE note released yesterday by the Economic and Social Research Institute paints a picture of an economy with credible medium-term prospects given certain assumptions.
The assumptions are that the Government introduces effective budgets next month and again next year, and that the global economic downturn does not develop into an extended, 1930s-type depression.
In the context of the current rather miserable economic situation, the note provides a basis for optimism and something to work towards.
Most people do not consider that we are in a 1930s-type situation, Prof John FitzGerald told The Irish Times. “If so, then Ireland will come right. We can chart a future for Ireland.”
A key difference between what we are now facing into and the situation the State faced in the 1980s, has to do with the balance of payments. By the end of this year the State may be exporting as many goods and services as it is importing. From then to 2015, the account may be in surplus.
Citizens are borrowing less and saving more, and the money being deposited in banks is being used by the banks to pay off their foreign debts. If this continues, then Ireland will be reducing its substantial private debt at the same time as the Government’s borrowings abroad are growing.
When international observers take better note of the positive balance of payments situation, and the repayment of private debt, confidence in the Irish economy should grow.
This in turn should reduce the rates being charged to the State for its borrowings abroad. Indeed the ESRI note finds it “surprising” that Ireland is being charged the risk premium it is being asked to pay for its foreign borrowings.
Ireland’s positive current balance of payments situation contrasts with that of countries such as Greece and Spain. It also contrasts with the Ireland of the 1980s, when the balance of payments deficit and government borrowings were both contributing to the net Irish debt burden.
Another key issue is the relatively low size of the Irish debt/GDP ratio. Having started this year at a net position of approximately 20 per cent, the note says the Government may have to borrow the equivalent of more than 10 per cent of GDP this year and next.
Even if the Government debt grows to 70 per cent of GDP or more by 2015, it will still be manageable. This remains the case even if the size of the bad debts in the banks is in the worst case scenario.
The ESRI note breaks the difficulties in the Irish economy into two elements: one arises from the global downturn; the other from the mismanagement of the economy by the Government over the past decade.
The former must await the global upturn, and when it comes will be addressed. The latter is a home-grown problem requiring home-grown solutions. The solutions required are the restoration of international competitiveness, and the building of a sufficient and sustainable Government revenue stream.
The ESRI note concludes that the public wishes to maintain current levels of public services. Therefore, a substantial increase in tax revenue is required. Higher taxes can affect the labour market and this, the note says, is an argument for such measures as taxes on carbon and on property.
To restore competitiveness, a substantial reduction in wages and other prices is required, the note says. A renegotiation through the partnership process of reduced wages, given the way prices are falling, “could prove helpful and it would be in the spirit of the partnership process”.
The quicker the adjustment in wage rates occurs, the less people will lose their jobs as a result of the downturn, the note argues. If competitiveness is restored by the end of next year, full employment could be achieved by the middle of the next decade.
