The Government should slow the pace of spending next year in order to prepare for possibly lower growth in the period after the general election, the Economic and Social Research Institute (ESRI) has warned, writes Marc Coleman, Economics Editor
In its latest quarterly economic commentary (QEC), the ESRI warns that rates of economic growth will slow after 2007, requiring the Government to "supplement" falling domestic demand.
The Labour Party reacted to the commentary by accusing the Government of using the budget as an electoral war chest. Government sources refused to comment on the ESRI's commentary.
While predicting economic growth to remain strong in 2006 and 2007, several factors could act to slow the economy thereafter, possibly making Government intervention necessary. Among the ESRI's concerns are the diminishing impact of SSIAs after 2007, the delayed impact of higher interest rates over this year and early next year and a possible slowdown in the rate of Government spending after the next election.
"The Government shouldn't add to booms . . . you want fiscal authorities to have the capacity to supplement any fall-off in domestic demand," ESRI economist Dr Alan Barrett said yesterday.
Dr Barrett argued that Government spending should act to smooth what economists refer to as the "business cycle" by being weaker in years of good economic growth and stronger in years of weaker economic growth.
However he described the present economic cycle - a term indicating the state of the economy - as being "out of synchronisation with the political cycle", suggesting that present planned high rates of growth in Government spending could be inappropriate.
Although the ESRI has not yet made a forecast for 2008, Dr Barrett predicted that the expected growth rates for 2006 and 2007 would not be sustained. "The one thing I will say is that I bet you it will be lower," Dr Barrett said.
An "orderly roll-out" of public spending over the next three years would be necessary to prepare for a weaker growth scenario, he added.
Together with what he described as an "unsustainable" dependence on the construction sector - which was making employment vulnerable to any decline in confidence in the housing market - Dr Barrett said that present growth was benefiting significantly from the release of SSIAs.
The ESRI's latest forecasts assume that one quarter of SSIA money will be spent in the economy next year. "That has a knock-on effect on the economy. You can also add in an investment effect on things like house extensions. Some 43,000 extra SSIA jobs would be created and an extra €2 billion will flow into the Exchequer."
The disappearance however of this impact in 2008 is among the list of concerns raised by the latest ESRI commentary.
Gross domestic product (GDP) - a measure of the economy's annual output - will grow by 5.6 per cent this year and by 5.2 per cent next year, according to ESRI forecasts, while 85,000 jobs will be created this year and a further 74,000 in 2007.
It predicts that the rate of inflation will rise above 4 per cent later this year and will average 3.8 per cent over the full year. Government spending in 2006 is expected to rise by 13 per cent.
Former finance minister and Labour Party spokesman on enterprise, trade and employment Ruairí Quinn said the Government was planning to use the next budget for a pre-election spending spree.
"There is every risk of damage being done to the Irish economy in the dying days of this Government. We simply cannot have the Exchequer turned into an FF/PD war chest," he said yesterday.