Now is not the time to cast doubts on our commitment to sorting out our problems, writes GARRET FitzGERALD
THE ECONOMIC and Social Research Institute (ESRI) is now 50 years old. We owe its existence to the initiative of
Dr TK Whitaker. Four years after his appointment as secretary of the Department of Finance in 1956, he discussed this concept within a small group of public servants and economists in which I was privileged to be a participant. He believed that Ireland needed an economic research capacity independent of the government and this was not then available within our university system.
Accordingly, he proposed to seek seed capital for this project from the Ford Foundation in New York; it is said contriving an “accidental” meeting with its current head at Mass in St Patrick’s Cathedral.
That initial Ford Foundation grant launched the institute as an independent research organisation, and within five years it was well enough established to secure public and private support. The economic skills that it has attracted from within our community and from outside this State have secured for it global recognition, with the result that much of its income now comes from work that it does on behalf of governments and public bodies all around the world.
In our present parlous economic situation the availability to our society of independent expertise is hugely important, and both its Quarterly Economic Commentary – the latest of which appeared last Wednesday – and the hundreds of specialised reports on aspects of our economy that it has published over the past half century have made a huge contribution to our society.
Coming at what is clearly a crucial moment in the life of our State, its latest Quarterly Economic Commentary raises crucial issues that should inform public debate.
First and foremost – and this has not been clear from some media reports – the institute accepts that, in relation to the target of reducing our budget deficit to 3 per cent of GDP, “an extension of (the 2014 deadline) is highly unlikely, and so we must operate within the constraints as presented”.
However, it believes this target date “is worryingly ambitious” and “will have severe implications for economic growth”.
I am sure that the institute is right in believing that “the markets” (those institutions that buy our government bonds) are primarily concerned with the credibility of our commitment to reduce our budget deficit to 3 per cent of GDP, the EU target for all member states, rather than with the precise time over which this will be achieved.
And the ESRI is probably right in judging that, if the European Commission had prescribed a deadline of 2016 rather than 2014, this would still have been seen as credible by international lenders.
But our problem is that the 2014 target, set by the European Commission at a press conference in Brussels 12 months ago that by chance I was able to attend, already involved an extension of an earlier 2013 deadline.
Seeking a second extension now is not on, as the commission made clear on Wednesday. This is not the moment to cast doubts on the strength of our commitment to sorting out our problems by seeking such an extension.
Minister for Finance Brian Lenihan has pointed out that, while seeking an extension now would be devoid of any credibility, we could get an extension of the 2014 deadline in a few years if we show a credible four-year plan now.
This firm position on the timescale has been reinforced by the recommitment of the leaders of Fine Gael and Labour to this four-year period after their discussion with the Taoiseach and Green Party leader.
It is also the case that if at this stage the Government was to continue to base its projections on the assumption of a growth rate of 4.5 per cent a year between 2011 and 2015, that could also undermine the credibility of our fiscal plan – currently the markets are spooked by the unexpectedly low US growth rate, a concern that may now be reinforced by a reduction also in the IMF’s growth expectations for the UK economy.
And given both the cost of our own bank bailout, and the impact abroad – however unjustified given the unreliability of our quarterly output figures – of the reported 1 per cent drop in GDP between the first and second quarters of this year, an attempt to base our fiscal plan on a high growth rate would have little credibility.
The low growth rate figures prudently used by the ESRI may have some validity for the next year or two, but, given the openness of our economy, if there is any recovery in the euro zone and the US from 2013 onwards we would be back on a high growth rate thereafter.
Already we are experiencing a growth of exports of goods that has few current parallels in Europe outside of Germany. Although most marked in respect of chemicals and pharmaceuticals manufactured by US multinationals, this export growth also extends to foodstuffs and machinery manufactured by indigenous firms.
Moreover, after a period when exports of services were flat, we have recently been experiencing renewed growth in exports especially of services, where we now seem to be responsible for 3 per cent of world trade.
So while we currently face severe economic problems, there are better prospects down the line. And, as the ESRI points out, if during this downturn we use available public funds to concentrate on reskilling unemployed people who are less well educated or have limited employment experience, this would facilitate and accelerate future economic growth.
Money invested this way will produce better returns in terms of future employment than the kind of make-work public capital projects that politicians and unions tend to favour.
Meanwhile, the ESRI also suggests that emigration in the 12 months ended April last may have been a good deal higher than the 34,500 that was suggested by CSO data published last month – which conflicts with other and perhaps more reliable CSO figures.
What the institute did not, however, explain is that the higher emigration figure seems to have reflected a greater outbound movement by recent immigrants returning mainly to eastern Europe. Net emigration by Irish nationals in that period seems to have been small – perhaps less than 15,000 – confirming the reluctance of unemployed Irish workers to emigrate until they have been out of work here for a prolonged period.
Although in our last crisis unemployment started to rise quite early in the year 1980, the volume of emigration did not become significant until 1986.