By Andrew Bushe
DUBLIN — The country’s leading economic think tank has revised its forecast for economic growth downward and has warned that just how strong the upturn will be in Ireland depends on the “fragile” strength of the international recovery.
The Economic and Social Research Institute forecasts 3.4 percent GDP growth this year and 4.7 percent in 2003 in its latest quarterly study.
In its Spring commentary, ESRI had predicted growth of 3.6 percent this year and 5 percent in 2003. It says the appreciation of the euro and continuing high growth in Ireland’s domestic cost structure will combine to erode competitiveness over the coming year.
“The better prospects for Irish growth forecast for 2003 are therefore dependent on a robust recovery in world trade volumes as the major economies return to strong growth rates,” the think tank said. “The uncertainty about an international recovery, reflected in the sharp fall in world equity markets, presents considerable downside risks for our forecast.”
There is a stark contrast in the institute’s forecast on the public finances, with its prediction differing from the government’s by a billion euros.
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ESRI says there will be a euro 947 million deficit by the end of the year, compared with the surplus of euro 170 million that Finance Minister Charlie McCreevy expects.
The public finances have deteriorated as a result of high government spending and modest tax revenue during the first half of the year, the commentary says.
“Despite our projections of improving economic growth conditions, the growth in public expenditure needs to be brought sharply in line with revenue growth for the remainder of the year and into 2003 to arrest the deterioration,” ESRI said.
The institute says pressure on public finances should not detract from the ambitious national program to develop the country’s infrastructure.
“Too often in the past, the stop-go nature of budgetary arithmetic has postponed necessary public investment,” it said. “The adoption of fixed expenditure rules that allow borrowing only for clearly defined investment purposes may be the clearest way to proceed, but this will necessarily require making hard choices in other areas in respect of reduced expenditure or increased taxation.”
The commentary forecasts that inflation will average 4.5 percent this year and 3.7 next.
The rate of unemployment is expected to average 4.6 percent this year and 4.5 percent in 2003.
It also warns on wage increases and the benchmarking recommendation of salary rises of almost 9 percent for public servants — almost one-sixth of the workforce.
ESRI says it “may do little to quell excessive wage expectations at a time of relatively high consumer price inflation. In addition, since public-sector salaries constitute nearly half of government net current spending, the scale of the recommended pay increases will put further pressure on the already deteriorating public finance position.”