The Economic and Social Research Institute (ESRI) has a good record at economic forecasting, notes Garret Fitzgerald. Of the eight Medium-Term Reviews of the economy that it has produced since 1986, only two proved over-optimistic.
The first of these cases was its 1989 Review. The institute did not foresee - but who anywhere in the world did! - the fall of the Berlin Wall, and the ensuing setback to European growth in the early 1990s brought about by the expensive terms on which West and East Germany were reunited a year or so later.
The following four Medium-Term Reviews in the 1990s - all of which were wrongly criticised at the time for being over-optimistic - under-estimated economic growth throughout the remainder of the 1990s, and only that of 2001, published in the immediate aftermath of September 11th, has been falsified by subsequent events. At the time the institute did point out that the "slow-down" scenario in that Medium-Term Review might be closer to reality than its "benchmark" projection, but it failed, like almost everyone else, to foresee the duration of this recession, which had already been under way for some months before the dramatic and tragic events in New York and Washington. The "benchmark" projection that the institute has now produced for the period to 2010, and in a less detailed form onwards to 2020, offers us a prospect of a return to a 5.5 per cent growth rate in the second half of the current decade - subject to several important qualifications.
As we have already increased our national output per head to a level slightly above the EU average, such a growth rate, during a period when the economy of the rest of the EU, as at present constituted, is expected to be growing by only 3 per cent a year, would bring our output per head up to a level about one-seventh higher than the average of our neighbours.
In that event we would find ourselves in the top group of five high-income European states. All of these are small countries - so in terms of income per head we would then have outpaced all the larger member-states: Britain, France, Germany, Italy and Spain.
But because the quality and scale of our infrastructure would at that point still be falling short of the kind of infrastructure that most of these neighbours of ours have built up over the past century, in 2010 we would still have at least five years to go before we would match their living standards.
The institute's projection of where we might find ourselves in seven years' time and in the following decade is based upon three assumptions about our behaviour during the intervening years.
First of all we would need to give priority to developing our infrastructure to the point where it could cope with such a large increase in investment and output. Second, we would need to ensure that wage rates do not out-run productivity and thus further damage our competitiveness - already significantly weakened by domestic inflation and by the recent rise in the euro. And, third, we would need to improve competitiveness in the sheltered sectors of our economy, where costs are far too high because of the tolerance of successive governments for the anti-social activities of various interest groups.
Taking these in turn, it has to be said that our Minister for Finance's priorities clearly do not match the current needs of our economy. For, resources needed urgently today for infrastructural investment have been diverted by him first of all through the SSIA scheme to buy the elections with a bonanza for investors on the eve of polling and, second, to tackle a pensions problem which is less serious for us - and several decades further away in time - than is the case with any other European state.
It will be time enough, the institute says, to set aside resources to supplement future pensions when we have completed the urgently needed modernisation of our infrastructure in 12 (or more probably 15) years' time - for if we don't complete this process in good time our prospect of continued rapid growth will be undermined.
The test of this Government's commitment to the future of our society will be its willingness to require the Minister for Finance to divert resources from funding a distant pensions problem, to investing adequately in meeting our infrastructural deficit.
The recent bout of wage inflation, including the benchmarking exercise, may have induced pessimism about the possibility of meeting the institute's second requirement: keeping wages increases in line with productivity. I would be more hopeful of success on this issue, however. Since 1987 union leaders have generally shown a capacity to persuade their members to pursue their long-term interest rather than to seek counter-productive short-term gains, and the expensive benchmarking exercise may have cleared the way for a smoother process of national pay negotiations in the future.
As for improving competitiveness in sheltered sectors, on this issue the Government has effectively and cleverly by-passed vested interests by setting up a well-staffed independent agency to tackle this problem.
Of these three problems the one in respect of which I would have most doubts is that concerning infrastructural investment - not only because the Taoiseach and other Ministers have hitherto shown a marked incapacity or unwillingness to persuade the Minister for Finance to modify unwise economic stances, but also because of the persistent mishandling by the public authorities of projects which has led to a huge escalation of costs.
The institute believes the penalty for failures under these three headings could be high. Thus, if wages rose 1 per cent faster each year than the amount justified by productivity increases, and if at the same time infrastructural bottlenecks were not removed, by 2010 national output would be 10 per cent lower than its benchmark projection suggests - and employment, instead of rising by 250,000, would be lower than it is today. That is a horrific prospect.
There is no room here for any further messing about with the economy, of the kind we experienced in the run-up to the last election. And the manner in which our Government system has hitherto addressed investment in infrastructure needs to be radically reformed, including the public/private investment approach which should concentrate much more on getting projects done efficiently. I shall return again to other aspects of this crucially important report on our future.