THE GOVERNMENT should try to keep this year’s general Government deficit “as close as possible” to 9.5 per cent, the target set out in the submission it made to the European Commission in January, the Central Bank said yesterday.
This contrasts with other commentators who have said that seeking to hit such a target could have an excessively deflationary effect on the economy.
On a pre-budget basis, the Department of Finance expects the Government deficit this year to be 12.75 per cent.
Tom O’Connell, assistant director general with the bank, said a budget that restored confidence could spark increased consumer spending, which would in turn soften the deflationary impact of the budget. This had occurred in the 1980s, he said.
Mr O’Connell said it was the bank’s view that the bulk of the expected Government deficit for this year was a structural deficit rather than one caused by the international downturn.
He said the bank believed the structural deficit was in the region of 10 per cent.
This contrasts with other commentators who have estimated it as being in the region of 8 per cent.
“The vast bulk of the [deficit] is underlying deficit and needs to be addressed,” he said.
In its latest quarterly review, published yesterday, the bank said past experience and international studies have shown that cuts in expenditure tend to be more successful than adjustments where tax increases predominate.
Mr O’Connell said Gross Domestic Product (GDP) is likely to fall by 12 per cent in the period to 2010. This made cutbacks impossible to avoid, he said.
“The world does not owe us a living. We can borrow, but we tried that in the 1980s and look where it got us.”
The bank said that in order to restore competitiveness in the Irish economy, a strategy was required that would encompass pay and price reductions.
A Central Bank survey that received 300 responses from private sector firms, indicated pay cuts of 8 per cent on average in recent times.
He said service prices here were “massively in excess of our European counterparts”.
The Government could effect a change in this as it was such a major purchaser of professional services.
On a pre-budget basis the bank believes GDP will fall by 7 per cent this year, with a slightly greater fall in the level of employment. Meanwhile, household saving is increasing at a rapid rate as discretionary spending is being reduced.
