MTR12

Today (Wednesday 10 July, 2013) the ESRI is publishing a major study on the medium-term outlook for Ireland. Medium-Term Review: 2013-2020 is the twelfth to be produced by the ESRI since the publication was first introduced in 1986. This Medium-Term Review fulfils a number of different purposes:

• It provides a longer-term perspective to the analysis in the regular ESRI Quarterly Economic Commentary (QEC). As many of the most pressing problems facing the economy today, such as the difficulties in the public finances and the high level of unemployment, can only be worked out over time, developing projections over a longer time horizon makes it possible to plan for more than one year ahead.
• It allows for an assessment of the long-run implications of current policy decisions.
• By developing a range of scenarios, the analysis can be used to indicate how policy may need to change in future to deal with different problems and needs that may arise.

We explore the sensitivity of our projections to alternative assumptions concerning key economic variables by setting out details on three different scenarios:

• In the Recovery scenario, the EU economy is assumed to return to a reasonable rate of growth over the rest of the decade. It is also assumed that the continuing problems in the Irish financial sector are tackled effectively. Under these circumstances, the economy could grow by around 3.5 per cent a year in the second half of the decade, more than halving the level of unemployment.
• The Delayed Adjustment scenario considers what would happen if the EU economy recovered but domestic policy failed to resolve the ongoing problems in the Irish financial system, or if some other domestic event or policy delayed a recovery. Such a scenario could see the economy seriously underperform relative to its potential. This would mean that a prolonged phase of fiscal policy tightening would be necessary to stabilise the debt and the unemployment rate would remain in double digits for most of the decade.
• The Stagnation scenario considers the circumstances where the EU economy does not return to growth in the near future. Under these circumstances the Irish economy, even if managed effectively, would struggle to grow at 1 per cent a year over the second half of the decade and the unemployment rate in 2020 would remain where it is today. In order to keep borrowing under control, continuing tough Budgets would be needed until the end of the decade.

Because of the uncertainty about the future, a “no regrets” approach to fiscal policy would entail implementing the planned €3 billion in cuts in the 2014 Budget. Then:

• if the Recovery scenario proved correct, that major adjustment would be the last needed to restore order to the public finances. Failure to implement the planned 2014 Budget would still leave a need for some cuts at a later date and the short-term benefit to growth would be fully offset in the medium-term;
• if the Stagnation scenario proved correct, the failure to make the adjustment in 2014 would leave a very big adjustment to be done in 2015 and 2016;
• the Delayed Adjustment scenario points to the need to resolve the continuing problems in the financial sector very rapidly. Failure to do so could both prejudice a potential recovery in the economy and it could also result in increasing the debts of the state.

Labour market policy must ensure that the experience of persistent long-term unemployment in the 1990s is not repeated and that a recovery in output over the rest of this decade is reflected rapidly in a reduction in unemployment. Note to Editors:

• Medium-Term Review: 2013-2020 , by John FitzGerald and Ide Kearney (eds.), Adele Bergin, Thomas Conefrey (Central Bank of Ireland), David Duffy, John FitzGerald, Ide Kearney, Kevin Timoney, Nuša Žnuderl, will be published online on the ESRI website at 00:01 am Wednesday 10 July.