By and large, the ESRI Medium-Term Review 1994-2000 paints the brightest and most inspiring prospects for the Irish economy since the 1960s. We will have to work hard to realise some of the forecasts, and even harder to improve on the key one, that for unemployment. There are no grounds for complacency.
The ESRI's principal positive projections are: an annual average growth rate of around 5 per cent from 1995 to 2000; a net rise in employment of 130,000 from 1,146,000 to reach the highest level in more than 40 years; steady low inflation at slightly over 2 per cent; a continuing balance of payments surplus, even after a period of high growth; a reduction of the debt-GDP ratio to less than 60 per cent by the year 2000, making our debt burden more sustainable; a substantial improvement in living standards and elimination of our current budget deficit by 1996 after 23 years.
The only real downside in the review is its projection that, despite high economic growth and high employment growth, unemployment by the year 2000 will still be around 266,000 on a live register basis or 18 per cent of the workforce, even though we are already experiencing the first significant drop in unemployment since 1990. That figure is equivalent to about 200,000 or 13.4 per cent of the workforce on the internationally standard labour force basis of calculation.
The ESRI expresses its bottom line in the following terms: "The central forecast suggests a period of substantial progress in improving living standards over the next decade. Ireland will have the capacity, if it has the will, to address its most basic problem, that of unemployment."
Before discussing these projections, I would like to pay a warm tribute to the ESRI, to its director, Dr. Kieran Kennedy, to John FitzGerald, Sara Cantillon and John Curtis, who worked on the medium-term review, and their predecessors, for their remarkable contribution over many years to a better understanding of our economy. Economics is not always viewed as a humane science. It can be, and has sometimes been, the precise opposite. The ESRI's reviews, however, always seem to be inspired by humane values, and by a real concern for the human consequences of economic policy. They are remarkably free of any obvious ideological bias, either to the left or the right.
As the ESRI would be the first to point out, it does not claim to be an infallible prophet. There are far too many complex factors, some of them almost impossible to foresee, which may affect our economy over the next six years, to allow their projections to be regarded as offering any certainties. This does not diminish the usefulness of the exercise, which is to project, on the basis of a reasonable assessment of present and forseeable trends, the most likely outcome. It gives policy-makers the opportunity, where they are dissatisfied with projected results, to try to improve on them in reality. We have done so in the recent past.
Thus, it would be quite wrong to believe the ESRI is being generally overoptimistic. For instance, in the 1986-90 outlook, a public sector borrowing requirement of about £1.6 billion was foreseen in 1990. As the result of more rapid correction in the public finances from 1987 onwards, the 1990 PSBR was less than half that. In the December 1987 review, employment was projected to stagnate for five years, because of the assumed deflationary effects of correcting the public finances. Net employment grew by more than 50,000, leading to the discovery of a new economic paradox, called expansionary fiscal contraction.
More recently, not foreseeing the depth of the international recession, the ESRI was more optimistic about unemployment post-1991 than events have justified. Perhaps, it is over-compensating in the other direction now. In most respects, its recent mid-term reviews have given a reliable guide to economic development. Its projections on employment growth have been remarkably accurate. Its view on inflation and the balance of payments has been vindicated. It has been broadly right on the healthy condition of the public finances, if somewhat over-optimistic about when we would move into budget surplus.
While the ESRI has a good track record, its real service is to help us to understand where we are, and where we are likely to be going, on present trends. By pointing up factors that need attention, its projections can act as a spur for an improved performance, which, if brought about, would invalidate its own projections.
Keen observers will have noted that these latest ESRI medium-term projections, particularly on growth, employment, and the debt-GDP ratio, are more optimistic than those published in our National Development Plan last autumn. Employment would, depending on assumptions, be between 14,000 and 44,000 higher over the priod, and average annual growth would be more than 1 per cent higher.
The intervening six months since September last have shown that the economy is performing better than anticipated. The 1993 budget outturn exceeded target. Net growth in employment was projected in this year's budget at 21,000 rather than the increase in non-agricultural employment of between 12 and 18,000 projected in the plan. GDP growth in the budget was set at 4 per cent rather than 3.5 per cent. This too is now likely to be exceeded.
Recent statistics suggest that we are entering a period of buoyant growth. In January and February of this year, the value of retail sales rose in terms of annual change by 12.9 per cent and 8.9 per cent respectively. New car sales were up 70 per cent this January. For the first time since 1980, growth over the next few years will be driven strongly by domestic consumer demand as well as by exports. In other words, we will have our economy firing on all cylinders. This is bound to be good for jobs, especially in the domestic sector of the economy. The trade figures for the first eight months of last year showed a surplus of £2.9 billion, which means that we were well on the way to a £4 billion plus trade surplus last year.
In short, the ESRI is starting from a much stronger base than the plan last autumn. Better results should assist us in finding the resources to implement the National Development Plan as fully as possible, with increased revenue buoyancy in parallel with continued progress on tax reductions, not net increases in tax rates as Opposition parties claim, helping to offset any shortfall in EU funding.
The very positive outlook for the rest of the 1990s did not happen just by chance or some undeserved stroke of good fortune. It is in my opinion attributable to three factors: first, the national consensus between the social partners maintained for over six years, and now into the third programme, the Programme for Competitiveness and Work, with its particular impact on competitveness in the broadest sense; second, the Government's prudent and effective management of our economy through the recent international recession and the currency crisis; and, third, the dramatic improvement in our economic health, achieved by decisive Government action in the late 1980s.
The ERSI repeats several times that the Irish economy has become more competitive. From 1960 to 1980, Ireland lost competitiveness vis-à-vis the UK, and in the 1970s and early 1980s vis-à-vis EU countries as well. It states that between 1986 and 1989 the competitive position of Irish firms vis-à-vis the UK improved significantly, and that this gain has been broadly retained. It envisages a small but steady improvement in competitiveness over the rest of the decade. They say that the underlying competitiveness of the economy has been masked by the fall-out from German unification and the related downturn in the EU economy. The ESRI states:
In our Central Forecast we have made quite a conservative assessment of the ability of the Irish manufacturing sector to take advantage of the position. It may well prove possible to expand output and employment more rapidly than we have suggested.
The ESRI states that if wages can be kept in line with the Programme for Competitiveness and Work, employment growth could be greater than projected. It positively assumes that wage bargaining behaviour will proceed much as it has in the last five or ten years, and not as it did before then, when all productivity gains were soaked up by wage increases.
I know that some Deputies opposite, influenced by some right-wing commentators, are highly critical of our social partnership approach, but in my opinion, it is demonstrably one of the main factors which has totally transformed our economic prospects.
The second factor underlying our improved prospects has been our prudent management of the economy during the recent recession. Ireland is the only EU country to have maintained significant economic growth, despite Britain experiencing the deepest recession since the war. We succeeded in maintaining previous employment gains. The positive point made by the ESRI is that employment gains made in the 1990s should be sustainable, unlike those of the late 1970s. Also, we did not allow our public finances to deteriorate outside the 3 per cent Maastricht limit, in contrast to many other EU countries.
The achievement of a dramatic fall in interest rates last year shows that the currency crisis and its aftermath were well handled. The cautious budgetary policies of 1993 were amply vindicated. The benefits of the fall in interest rates far outweighed the 1 per cent levy. Inflation, which was one obvious danger following devaluation, was successfully held down. Since last September, the Irish pound has been consistently the strongest currency in the ERM grid. The Financial Times described our performance at the beginning of 1994 as “one of the most attractive stories around”.
It is a tribute to the success of this partnership Government that, taking over in a difficult situation at the height of the currency crisis and with unemployment over 300,000, we stabilized the threat, we resumed economic progress and set Ireland en route for the most positive economic prospects in decades. As the ESRI points out the transformation of the public finances, and the steady reduction in the relative size of our debt will reduce our vulnerability to economic upsets in future years.
We must never forget the lessons of the past 20 years. We are still coping with the legacy of the mistakes made between 1973 and 1986. We did not maintain a tight grip following EC entry in 1973, and the short-lived agriculture-led bonanza. There was a naïve belief in a crude version of Keynesian economics, with the new phenomenon of current budget deficits and foreign borrowing being greeted as if they were the discovery of Eldorado. A large increase in public sector employment was never going to stimulate the private sector. Subsequent efforts to maintain employment by counter-cyclical measures only exacerbated the problem.
Unfortunately, for a long time after we had identified our mistakes, we were totally ineffective in correcting them. The policy of large tax increases, especially in indirect tax, in several budgets from July 1981 on, in a vain attempt to avoid the hard choices of public expenditure cuts, destroyed confidence. The country wasted four or five previous years floundering and without any clear direction, while other countries forged ahead.
What Peter Bacon in the 1986 ESRI Medium-Term Outlook called "a period of appalling economic performance in Ireland", was an aberration which must never be repeated. Since we bit the bullet and cut public expenditure by over ten percentage points of GNP, we have never looked back. Encouragingly, the ESRI foresee public expenditure as a percentage of GNP falling steadily to the year 2005, despite some modest growth in its volume. Tax revenue is also a lesser proportion of GNP than some years ago.
Better economic prospects do not entitle us to relax financial discipline in any major way. There will be no public spending spree. Tax cuts in the right places are just as effective a method of promoting economic justice among many of the lower income groups as increased State spending. If we can reduce unproductive State spending, on servicing the national debt or unemployment payments, through more unemployed people getting jobs, then it is legitimate to switch part of those proceeds into improved public services. That is what we have being doing over the recent past. We also have a duty to see that pensioners and the less well off share in the benefits of growth and prosperity. I am all in favour of doing more to help the most disadvantaged groups in our society, but not by a general rise in spending.
Extreme prudence is required, so that we do not repeat the mistakes of the past. One of those mistakes is to assume, even on as good authority as the ESRI, steady high growth into the indefinite future. Economic cycles, external shocks are capable of disrupting progress for several years without notice, and we have to build that possibility into our policies.
With 290,000 unemployed, we must do everything possible and sensible to reduce that number. The clear definite downward trend this year is encouraging and we have already been able to lower our forecast average number of unemployed this year by 4,000 since the budget. What we need are well-targeted policy measures, not a general relaxation of spending controls and still less expansionary measures that would stoke an unsustainable boom. The best way to prolong good economic conditions is for Governments to be prudent and restrained.
In assessing any policy adjustments to be made all these realities must be taken into account. I am determined that we will not blow it in the 1990s the way we did in the 1970s and for much of the 1980s as well. This is the chance for Ireland to make a real economic breakthrough, if we play our cards right.
Some critics of the National Development Plan, including the leader of the Progressive Democrats, have suggested we should use EU funding to pay off the national debt, something that we are not allowed to do directly.
