The Government-backed Special Savings Investment Account scheme, the pre-funding of pensions and benchmarking will lead to further cutbacks in Government spending and higher taxes, an economist has warned.
Addressing the Institute of Certified Public Accountants annual conference in Cork yesterday, Ulster Bank head of research, Mr Pat McArdle, said these initiatives were unjustifiable from an economic perspective. "They represent a drain on resources which we can ill afford given the deficiencies in the health and transport sectors, not to mention the pending benchmarking on public sector pay."
Mr McArdle told the conference that the economic assumptions underlying the various election manifestoes were unduly optimistic. A new Government will have to find up to €3 billion to fund these initiatives either through borrowing or higher taxation.
"To the extent that additional public sector spending is deemed necessary, it will have to be funded by cutbacks elsewhere or higher taxes. This will undermine recent progress and make the negotiation of a new wage agreement particularly difficult because wage expectations have yet to adjust to the new economic realities," he said.
Ms Ann O'Connell, a partner at PricewaterhouseCoopers, warned that slashing costs and reducing staff numbers were not always wise responses to an economic downturn. She stressed that cost-cutting could be fatal leaving companies under-resourced for the future. Ms O'Connell suggested that after many years of skills shortages, companies should seek to be more creative in their response to a slump in business activity.
Options included securing greater efficiencies in procurement, outsourcing non-core activities and offering extended leave of absence to reduce labour costs and ensure a ready supply of staff for when economic conditions become more favourable. She urged companies to take a longer term strategic view of operations suggesting that recessions offer businesses a greater opportunity to change their strategy than during a boom.
"The reaction in many companies to a slowdown is to cut costs and lay off staff. But layoffs are not a panacea and in many cases cutting costs is more about impressing analysts and shareholders than improving the fundamentals of the business." Despite slower economic growth she said that companies should be sufficiently flexible to respond to changes in circumstances.
"There is no doubt that we are entering a turbulent economic phase. However, the strong performance of Irish companies in recent years means that many have the resources and flexibility to adapt to these new conditions. By focusing on core business, acting quickly to changing market conditions without over-correction and by seizing opportunities many companies can grow during a recession."
