STRONG ACTION targeting the deficit in the public finances is required in the forthcoming budget, the Economic and Social Research Institute (ESRI) has said.
In a paper, which was published yesterday, the institute says the appropriate target for the budget is the “structural deficit” in the Government’s finances, and not that part of the deficit that is being caused by the global economic downturn.
The paper recommends a level of savings/revenue-raising measures that are less severe than envisaged by some commentators.
Also it says that if, as is now expected, the global economy recovers in 2011, the Irish economy will be expected to grow at well above its 3 per cent per year potential for several years, as it regains some of the losses incurred during the recession.
Rates of 5 to 6 per cent per year can be achieved, it notes.
The general Government deficit this year, without Government action, is expected to exceed 10 per cent of gross domestic product (GDP).However, the ESRI believes the budget should target only that part of the deficit that is the result of permanent changes in the economy.
That part of the deficit which is due to the global downturn will disappear when the world economy recovers, the paper says.
It adds that research by the ESRI suggests that the structural deficit for this year will be in the order of 6 to 8 per cent of GDP.
“The serious problems that are a legacy of past policy mistakes culminating with the building and construction bubble have to be tackled by tough fiscal policy measures. The element of Ireland’s economic difficulties which derives from the world recession should await a world recovery for an effective cure.”
The paper argues that the budgets this year and next year should seek to halve the structural deficit by the end of 2010.
This would mean cumulative savings/revenue-raising measures that would reduce the deficit by €4.5 billion to €6 billion over the two budgets, Prof John FitzGerald told The Irish Times.
When seeking to make these reductions in the deficit, the Government will have to take into account the effects the budgetary measures will have on the economy.
The paper, Macroeconomic Context for a Sustainable Recovery, was written by Adele Bergin, Thomas Conefrey, John FitzGerald and Ide Kearney.
It represents the preliminary results of research under way at the ESRI on the problems facing the Irish economy.