Economy can still grow faster than EU average - ESRI

If swift action is taken to remedy the deteriorating public finances, the economy can continue to grow faster than the EU average until 2010, according to the Economic and Social Research Institute.

Assessing the State's economic prospects for the next five years for delegates at the Institution of Engineers' annual conference, senior researcher Professor John Fitzgerald, said output growth would probably fall to 5 per cent by 2005, before joining the EU average of just under three per cent by 2010.

Mr Fitzgerald advised a "neutral" fiscal policy until 2005 because "eighteen months of belt-tightening should be all that is needed compared to the decade of pain we experienced in the 1980s".

However, echoing the ESRI's recommendations on Budget 2003, he recommended "significant restraint" compared to the last five years.He said it was appropriate to aim for a general Government surplus of 1 per cent of GNP each year. He criticised last year's Budget for being "exceptionally stimulatory and inappropriate to the needs of the economy".

The full implementation of National Development Plan infrastructure projects remains vital to the future capacity of the economy to expand, he said. However, Mr Fitzgerald cautioned that these investments must represent good value for money.

Employment growth will be approximately two per cent a year, significantly slower than the last decade. He warned that with the economy currently close to full employment, rising wages have led to a loss of competitiveness. The economic downturn is expected to moderate wage inflation the medium term, Mr Fitzgerald said.

Immigration of skilled labour had contributed to the economy's recent success and would continue to do so. But Mr Fitzgerald also said a transparent and fair immigration for unskilled labour was urgently required.

Mr Fitzgerald admitted this was a relatively benign scenario. If the US economy suffered over next few years, Ireland's economic prospects could prove much less favourable.

One certainty was that the State's obligations under the Kyoto protocol were unlikely to be met, Mr Fitzgerald said. Ireland is required to limits its green house gas emissions to 13 per cent above its 1990 levels by 2010. The ESRI expects the State will be 21 per above its 19990 levels as demand for energy continues to rise.