Vol. 517 No. 2
5 Mr. Deenihan asked the Minister for Finance if his attention has been drawn to a recent statement by an economist at the ESRI expressing concern regarding the economic outlook; and if he will make a statement on the matter. [9421/00]
The Economic and Social Research Institute, ESRI, in its most recent assessment of the economic outlook, forecast continued strong economic growth. For this year, growth in GNP of almost 6% is forecast. For next year, growth in GNP of almost 5% is expected. The unemployment rate is expected to fall to below 4.5% by 2001. These projections are broadly in line with my Department's assessment, which I presented to the Dáil on budget day last December.
I agree with the ESRI that the competitiveness of the economy is a key concern. Maintaining competitive wage levels was a key objective of the recently agreed Programme for Prosperity and Fairness, PPF. I am pleased the ESRI's assessment is that "these wage increases are reasonable and within the range the economy can afford". It is crucial for the economy that the terms of this new agreement are met.
The ESRI suggests that the commitments to cutting taxes and increasing expenditure outlined in the PPF could endanger our medium term economic prospects. It is the view of the Government that not only are tax cuts an essential part of the agreement, but they are also necessary to support increases in the supply of labour. The commitments in this programme are predicated on the Government continuing to run significant budget surpluses. Last year we recorded the largest surplus in the history of the State. The Government intends to continue with its prudent policies while addressing the many problems we face.
The ESRI also highlights pressures in the housing market. Increasing the supply of housing remains the Government's main policy response to the sharp increase in prices. Last year, almost 50,000 houses were built, compared to 21,000 in 1993, an increase of more than 100% over the period. The Government is continuing with a range of initiatives to further increase the supply of housing. Success in this area is already being reflected in moderating house price growth.
Does the Minister give any credence to the comments of an economist at the ESRI that there should be a tightening approach to budgetary policy rather than the inflationary approach that has been pursued in recent budgets? Does the Minister take seriously what the economist said or is he totally discarding it?
Economists make suggestions and advisers give advice all the time, and Governments take some of them and reject others. For a number of years that particular economist and others have recommended to successive Governments that tax relief on mortgage interest should be abolished. No Government, however, has ever abided by that advice. Other economists have recommended to me that we should not be increasing current and public expenditure, and I have not taken that advice either. The public capital programme is one way of trying to create a better infrastructure which allows economic growth to continue and will moderate any price inflation. Therefore, I do not accept the suggestion that tax cuts are inflationary. The combination of tax cuts and moderate wage increases has been a recipe for a large part of our economic success. I take into account some things the ESRI says, in that it is important to maintain competitiveness. The way we have approached this in recent years is the balanced and correct way of doing it.
According to the HICP, inflation in the euro zone in February was 2%, whereas it was 4.6% in Ireland. The Minister says this is because of increases in the budget but if this 3% to 4% rate of inflation is consistent, should he not be concerned about the economy? Will he consider taking steps to cool down the economy?
I would like people to be quite clear on what some economists are talking about. As the Deputy knows, I do not subscribe to the economic textbook view of inflation as it applies in Ireland. I am on the record as having said so for many years when I was in Opposition and I have been proven correct about it. If one accepted that one could tackle inflation by doing something in the fiscal area, one would be talking about taking not hundreds of millions of pounds out of the economy but billions if it were to have any effect, which would be very small. The only way of doing that would be to impose higher taxes rather than reducing them, or to cut current expenditure by billions of pounds. Is anyone in this House advocating that we should do that? First, it would not be politically possible and, second, it would be economically daft because it does not work like that in a small open economy such as Ireland's. That has been proven in recent years. People looking at the economy from outside should not apply textbook economic theories as they apply to larger closed economies because it has not worked like that here.
