THE ECONOMY is in a weak state. But while its strength has been sapped, it is not on its deathbed.
With careful management by Government and a degree of self-restraint on the part of the public, the economy can be nursed back to health relatively quickly.
The full extent of the deterioration in the economy's recent performance is captured in the Government's downward revision of its growth forecasts for 2008, published on Wednesday. The anticipated rate of economic growth this year has been cut to 0.5 per cent from 3 per cent when the 2008 budget was published last December. The principal cause of this revision is the virtual collapse of activity in the building sector. As a result, the volume of fixed investment, of which construction is the largest part, is now forecast to fall by 15 per cent this year. Of itself, the precipitous decline in house building has clipped four percentage points off this year's growth rate.
This reversal of economic fortune has caused tax receipts to fall far short of initial expectations. For the first six months of the year, tax revenues gathered by the exchequer were €1.45 billion or 7 per cent below budget targets. The Government now estimates that, in terms of tax receipts, it will be out of pocket to the tune of €3 billion by the year end.
At the same time, increasing claims for unemployment benefits, reflecting the steep rise in unemployment, is exerting upward pressure on day-to-day Government spending. The numbers on the Live Register, which measures benefit claimants, are now expected to average 210,000 this year, a 40,000 increase on the budget estimate. In the absence of remedial action, the potential overshoot on current public spending this year is now calculated at some €500 million.
The economy's short-term difficulties were compounded yesterday by the decision of the European Central Bank (ECB) to raise its key interest rate from 4 per cent to 4.25 per cent. This increase in the cost of money will act as a further deterrent to industrial investment while adding to the mortgage repayment bills of households.
With the economy on the slide, the Government must keep its balance and its nerve. It has already let it be known that it will announce a package of measures next week that will seek to correct the potential overshoot in current public spending this year. This is an appropriate response. It is now too late in the day to undertake a wholesale revision of the spending plans contained in the 2008 budget. Introducing a swathe of spending cuts would smack of panic, since the current budget is still scheduled to finish the year in surplus. The ultimate impact would be to disrupt the provision of services to the public.
It would be much better for Government to spend its time thinking about tomorrow. The continuance of existing public spending policies would see Ireland breach the 3 per cent limit on budget deficits, imposed by the EU Stability and Growth Pact, in 2009. This cannot be allowed to happen, as it would damage the credibility of Irish economic policy abroad, not least in the eyes of potential foreign investors.