HIGHER EARNERS shouldered the bulk of the fiscal adjustments introduced in the recent budgets, the Economic and Social Research Institute (ESRI) has said.
While those on lowest incomes were hit hardest by the most recent Budget, an analysis by the institute has shown that the cumulative effect of the three budgets in the past 14 months was progressive.
The highest fifth of households in income terms suffered income loss of approximately 6 per cent as a result of the budgets, while the income of the lowest fifth “hardly changed”.
The analysis takes into account falling wages and prices. The first 2009 budget included a rise in welfare rates.
In its latest quarterly economic commentary the institute, which believes gross national product (GNP) will fall by 10 per cent this year, predicts an “anaemic” return to economic growth in the second half of next year.
It expects that the loss of economic output in the early part of 2010 will mean that overall GNP will fall by a further 1.5 per cent next year.
The institute expects unemployment will average 11.75 per cent this year, and peak at close to 14 per cent late next year.
At a press briefing yesterday one of the authors of the report, Dr Alan Barrett, said that on a macroeconomic level the “worst is over” but that unemployment will continue to deteriorate.
Also, while public finances had been stabilised, there was still a need for substantial additional fiscal adjustments in the coming years. So in that regard also “it would be overstating it to say the worst was over”.
The Budget announcement that property taxes and water charges were on the way was welcome, the institute said. “A property tax will represent a broadening of the tax base; charging for water will raise revenue and will also provide correct incentives for water usage.”
Dr Barrett said new data on wages from the Central Statistics Office (CSO) released yesterday and confirming wage reductions in the private sector meant progress was being made in increasing our international competitiveness.
He said there had been positive developments over the year in the international economic situation and in the public finances, and that the CSO data indicated Ireland was now better placed to benefit from an international uplift. He said it remained unclear how much the banking crisis was going to cost the taxpayer.
Dr Ide Kearney said the institute had been surprised by the drop in labour force participation, which fell by more than 52,000 in the 12 months to the end of September. It had “dropped like a stone” due to such factors as people opting to go to college or women leaving the workforce. This and emigration had prevented unemployment from growing at an even faster rate .
“It is hard to overstate what a difficult year 2009 has been for the Irish economy,” the commentary says. It shows that while gross domestic product is expected to fall by 7.25 per cent this year, the comparable figure for the euro zone is 4 per cent. For the UK it is 4.7 per cent, for the US 2.5 per cent and for the OECD, 3.5 per cent.
In more recent times the bigger economies have shown a return to economic growth and there has been a rise in world trade, which should be positive for this economy. However, the commentary says it remains a real concern that interest rates might rise in the euro zone when recovery begins to take root, but at a time when the Irish recovery is still fragile. “This remains a big concern.”
The institute believes it is likely that Irish financial institutions will increase interest rates on variable mortgages.
The CSO data on wages showed that average weekly earnings have fallen 1.1 per cent in the year to the second quarter of 2009. The Earnings Hours and Employment Costs Survey showed the largest impact was in finance and real estate, where earnings slumped 13.3 per cent, mainly due to a drop of two-thirds in irregular payments. Pay in the education sector rose 1 per cent, it found.
The average weekly wage now stands at €698.43, compared with €706.03 in the same period in 2008.