Taoiseach Brian Cowen and Minister for Finance Brian Lenihan have vowed to take "resolute" action to deal with a "serious problem" facing the Irish economy after a report showed the State faces a recession this year for the first time since 1983.
The ESRI has forecast the economy will contract by 0.4 per cent this year, unemployment will rise and net emigration will return next year.
Mr Lenihan said he will discuss the deteriorating economic outlook with Government colleagues next Wednesday when half-year figures are published by the Department of Finance. At this stage, Mr Lenihan indicated, the Government will discuss possible cutbacks that will be implemented immediately.
“We’re not in a position to make a final judgment on our exact position until we see what our revenue receipts are mid-year. So I’ll have that information next Wednesday and I’ll be discussing with my colleagues the decisions we need to take.
"On the spending front, if we are to take action, we have to start taking action now because the reality is you cannot reposition spending for 2009 unless you start taking action in 2008," Mr Lenihan told RTÉ Radio's News at One.
"We will have to take resolute, prudent and determined action to deal with the position that is illustrated in this report," Mr Lenihan told the programme.
The Taoiseach faced sharp criticism over his handling of the economy during his time as Minister for Finance
“There is a serious problem and we’ll have to recognise it and deal with it.
“We can’t have a position where we spend more on current services than we can afford. We have to ensure that the operating cost of this State is sustainable. That’s the first priority. Then we need to look where we need to invest for the future. . . . We need to invest in those projects that will give us a real return in the future.
“If we take the necessary corrective action now we will put our economy on a sustainable path for the future.
Mr Lenihan said any changes in taxes would wait until his December budget. The Minister said he appreciated "the pain felt by consumers when they look at rising fuel prices and rising food prices.
"I see the problems businessmen have when we look at an international credit squeeze, when we see monies cannot be advanced by banks. All of this has not been created here in Ireland, this has happened worldwide at present, and we have to study the international position and react accordingly."
Responding to Opposition accusations in the Dáil that the Government had no plans to deal with the current downturn in the economy, Mr Cowen admitted the country was facing a serious economic challenge and that spending will have to be prioritised in the years ahead.
Mr Cowen said there was a correction taking place in the housing market that had a drag of about 4 per cent on growth.
He said the economy was not immune either to the global situation and would have to be managed sensibly and prudently until there is an upturn.
“We have clearly got a reduction in our tax revenue forecasts which means our deficit will be greater than otherwise planned for. We must devise a budgetary strategy for 2009 and 2010 which will ensure we will maintain sustainable services going forward."
But the Taoiseach insisted the country was in a much better position to deal with the current economic climate because of “our debt reduction policies during the good times”.
Fine Gael Leader Enda Kenny accused Mr Cowen of refusing to put forward a Government response "to a problem that has been developing for the last six months".
“The Taoiseach is clearly in denial on the state of the recessionary pressures facing the Irish economy. He offers nothing other than bland and meaningless technocratic formulations as his response, rather than any tangible action to address the weaknesses in our finances," Mr Kenny said.
“It appears now that the days when Brian Cowen was a straight talker are over. Rather than admit that the economy is in recession and set out a plan of action to deal with that reality we got useless generalities."
Fine Gael spokesman on finance Richard Bruton attacked Mr Cowen’s tenure as minister for finance, describing the ESRI commentary as a “damning indictment” of his record.
Mr Bruton said the legacy of Fianna Fáil’s 11 years in power is a country where “rip-off prices are the norm and where frontline services are being slashed.
“The consequences of Brian Cowen’s neglect were to turn a €2 billion surplus into a deficit of €8 billion and rising, which has totally destroyed the Government’s room for manoeuvre in the public finances”.
Deputy leader of the Labour Party Joan Burton said the Government had to acknowledge the scale of the problems facing Ireland’s economy.
Ms Burton said the ESRI’s warning about the need to avoid a rapid correction in the Exchequer position must be heeded but that urgent action needed to be taken on the issue of job losses in the construction and manufacturing sectors.
Sinn Féin's spokesman on economic affairs, Arthur Morgan, said there was little public confidence in the ability of the Government to manage the current economic difficulties. He warned that "there must be no repeat of past mistakes such as the severe cutbacks in public services in the 1980s that we are still feeling the impact of today".
Small Firms Association director Patricia Callan said: “Small businesses are on red alert following confirmation by the ESRI that Ireland is now in the grip of a recession."
Ms Callan called on the Government to focus all its efforts on leading a national response to the rising cost base in Ireland, as “it is clear we are now completely reliant on the small business community to trade our way out of this economic downturn”.
The ESRI forecasts in its latest Quarterly Economic Commentary, published today, that the economy will contract in size by 0.4 per cent this year after growing by 4.5 per cent in 2007. Economic growth is expected to resume next year with a forecast expansion rate of 1.9 per cent.
However, the ESRI said that this would not be enough to stem a recurrence of net emigration in 2009. The ESRI projects the numbers of people leaving the country will reach 20,000 next year, a level of net emigration not seen since 1990.
The ESRI also projects that the level of unemployment will increase by 60,000 or 60 per cent between 2007 and 2009.
From an overall budget surplus of €5.2 billion in 2006, the Government is expected to incur a deficit of €7.4 billion in 2009, a turnaround of more than €12.5 billion in the space of three years.
The ESRI also estimates that house prices were overvalued by 12.5 per cent in 2007 and it projects a 6.3 per cent decline in house prices this year followed by a further 1.5 per cent fall in 2009.