Recovery Scenarios for Ireland: An Update

21 July 2010

Recovery Scenarios for Ireland: An Update

By Adele Bergin, Thomas Conefrey, John Fitz Gerald and Ide Kearney In May 2009, we published Recovery Scenarios for Ireland, which considered possible paths to recovery for the Irish economy. We now return to this work to provide an update one year on.

• Because of the uncertainty about the future we consider two medium-term scenarios for the economy. In our High Growth scenario, there could be a vigorous recovery over the period 2012 to 2015. In the less optimistic Low Growth scenario the recovery in output, while significant, would be much lower, resulting in substantial continuing unemployment and a higher structural budget deficit.
• The economy has suffered a permanent major loss of output. Output could end up between 15 and 20 per cent below where it would have been without the crisis. Under our High Growth scenario, output per head will not be restored to its 2007 level until 2015. On the basis of the Low Growth scenario, the losses would be higher and a full recovery would take longer.
• The deadweight cost of the banking crisis has significantly added to the burden of fiscal adjustment. We estimate that the fiscal adjustment planned by the Government of a further €7.5 billion over the period 2011-14 would be almost enough to produce compliance with the Stability and Growth Pact (SGP) by 2014 under the High Growth scenario. If the economy were to develop in line with the Low Growth scenario, additional fiscal action would be required to meet the SGP target.
• A failure to tackle the fiscal crisis in 2009-10 would have greatly aggravated the difficulties facing the economy. This would have been manifested in an elevated level of debt, debt-interest payments and a higher interest rate. Had the fiscal action been delayed, it would have required even more severe cuts than today. The full cost of delayed fiscal action could have amounted to at least 10 per cent of GNP.
• The austerity measures undertaken in the 2009 and 2010 budgets have already achieved much of the heavy lifting in relation to reducing the structural deficit. Even under the Low Growth scenario, we estimate that the structural deficit, while still substantial, would be less than that estimated by the EU Commission.

  Policy Implications

• Effective and consistent labour market policies are needed to ensure that Ireland is not left with a legacy of unskilled long-term unemployment. Failure to implement such policies will significantly hamper recovery and greatly increase the social cost of the crisis.
• A sustained improvement in competitiveness is required if the Irish economy is to return to export-led growth and full employment in a reasonable time scale.
• The sensitivity of the risk premium to the fiscal stance calls for the full implementation of the government’s fiscal austerity programme. This represents a “no regrets” policy in the face of uncertainty about the future.

Link to Publication