Lenihan Set To Slash Spending As Tough Budget Looms

The Finance Minister has announced he is to impose major spending cutbacks to counter the economic crisis regardless of warnings by an influential economic think tank.

Minister Brian Lenihan said the government had "to start taking action now”, and stressed the importance of "prudence".

However a document published on Tuesday by the Economic and Social Research Institute (ESRI) has forewarned the Government against cutting spending.

The report suggested that if its forecasts are correct, Ireland is to "experience its first recession since 1983".

But the ERSI implored the Government not to introduce reactionary correction measures such as slashing public spending, as ironically in light of the recent Lisbon treaty rejection, Ireland must meet a 3% growth target or it could face being kicked out of the EU.

Slashing public spending could mean achieving this target is exceptionally difficult.

Instead, the ESRI suggested spreading the projected shortfall over to 2009 to absorb the impact and allowing Ireland’s economy to avoid spiking inflation and keep the wheels turning.

However, the recent announcement by Mr Lenihan seems to indicate he is to ignore this advice, despite basing his actions on the figures within the ESRI document.

Speaking at the Chamber of Commerce Midsummer Fundraising Ball, Mr Lenihan said: "The current economic environment is the most challenging for some time. Indeed, there is a whole generation out there that has never known a cold economic wind and now it is clear that we are in the middle of a storm."

Meanwhile, a stark assessment of Ireland's immediate future by AIB bank's top economists has reported that house prices will continue to fall well into 2009, and unemployment will hit 6.5%.

A team of four AIB Global Treasury economists released their latest update on the Irish economy this week.

They believe it will not get back on track until 2010 when GDP growth will recover to 4%, from a forecast 1.3% this year, and 2.55% in 2009.

Chief Economist John Beggs said it is not surprising that the downturn in the economy has a recessionary feel to it: "It is important, though, to keep the downturn in perspective as it comes after a prolonged period of very robust growth, stretching back to the early 1990s."

However, as the Government faces its second budget deficit since 1977, the AIB team said: "Tough budgets are required in 2009 and 2010 to maintain the public finances in a healthy condition.

"Tax receipts this year are likely to undershoot target by some €2.5 billion, pointing to a budget deficit of 2.2% of GDP, which compares to a surplus of 3% of GDP in 2006."

See: Ireland To Plunge Into Recession

(DW)