If short-term economic forecasting is difficult, given frequent revisions to the projected annual growth rate of the economy, medium-term forecasting to 2020 might seem like a wasteful exercise in pure speculation. Nevertheless, the Economic and Social Research Institute (ESRI) has been right to offer a medium-term view of the outlook for the Irish economy over the next six years. And it uses three different scenarios for the economy to examine the potential challenges ahead, and to help inform a wider public debate.
In the ESRI’s dream scenario, where growth in the EU economy recovers at a reasonable rate, the Irish economy could enjoy a 3.5 per cent annual growth rate by the end of the decade, with the level of unemployment more than halving. In its nightmare scenario, the EU economy fails to recover and stagnation prevails. In such a situation, the domestic economy would struggle to grow at 1 per cent a year and, by 2020, the unemployment rate would be no lower than today. While under another malign scenario, where the EU economy recovered but domestic policy failed to respond and the economy underperformed, fiscal tightening (spending cuts and tax rises) would again be needed to stabilise public debt.
The wide range of scenarios outlined by the ESRI reflects the very uncertain outlook for the world economy. Given that background, the ESRI recommends that the Government fully implements the planned €3.1 billion in spending and tax adjustments in the forthcoming budget in October. Doing it now, the ESRI claims, is an easier and less risky option than deferring some of the tax and spending adjustments until later, when economic conditions may have deteriorated. The ESRI's view, however, remains at odds with Ibec, the employers group, and the trade unions. While both employers and unions agree on using some of the €1 billion in interest savings on the promissory note deal to reduce austerity measures in the budget, they disagree on how to do it. While Minister of Finance, Michael Noonan, has remained non-committal on the issue, saying it will not be considered before mid-September.
In the meantime, as Ireland prepares to exit the bailout programme at year-end, Mr Noonan now proposes to discuss exit strategies with the troika of international lenders. This is to ensure that after the bailout Ireland retains access to market funding at low interest rates. But whether that will require the Government to take out some insurance against any sudden loss of market confidence, via a reserve line of credit for use in a financial emergency, has yet to be decided. The result of those discussions will also have a bearing on whether the Government has scope to ease up on austerity in the next budget, and whether it can safely do so without losing credibility with financial markets at a critical time.
