Michael Burke: The EU Commission Spring 2012 economic forecasts have just been published. It is likely that the downgrading of current growth forecasts will receive some media attention. The EU Commission is now forecasting just 0.5% real GDP growth for Ireland in 2012, followed by 1.9% in 2013. These are significant reductions made from the Autumn 2011 forecasts. Then, growth of 1.1% was projected for this year and 2.3% for 2013.
No doubt, supporters of government policy will point to the fact that there is some growth forecast at all. Even this meagre level of increased activity is better than the average for the Euro Area as a whole, which is expected to contract by 0.3% this year. Surely, this means that the ‘austerity’ medicine is working in Ireland, if, strangely not elsewhere? Well, no.
Back in Spring 2010 the Commission’s initial forecast for Irish GDP in 2011 growth was 3%. It is now estimating that growth was less than one quarter of that level, just 0.7%. Similarly, the initial forecast for 2012 growth was just 1.9% (made in Autumn 2010). Again, it is now expected to be about one quarter of that growth rate, at 0.5%. The outlook for growth is getting worse, not better.
As is well known, the GDP data can be misleading. As Ireland is a weight-station for overseas profits booked to avail of low taxes, other indicators are needed to gauge real activity. In Spring 2010 the Commission was forecasting that both employment and domestic demand would expand, by 0.4% an 2% in 2011. It now expects the latter to have contracted by 3% and to continue to do so over the forecast time horizon (til 2013). Employment was initially expected to grow by 0.4% in 2011. It is now assumed to have contracted by 2.1% and will not expand til 2013, according to these forecasts. Altogether the Commission expects that one in seven jobs will have been lost during the Irish Depression, even if its forecasts do not prove to be overly optimistic once again.
But what of the sole indicator which is now said to be targeted by the government and the Troika, the judge and jury of all economic policy, namely the structural (or cyclically-adjusted) budget deficit? The EU Commission now forecasts that this structural deficit (SD) will rise in 2013 to 7.9% of GDP, from 7.8% in 2012. This compares to a SD of 7.3% of GDP in 2008, when ‘austerity’ began.
In terms of the actual, measured deficit this is now expected to be 7.5% of GDP in 2013, compared to 7.3% in 2008. Even this miserable performance has been achieved by the simple expedient of cutting government investment. In 2008, in the dog days of the previous government the level of state investment was equivalent to 5.2% of GDP. It is now projected to fall to 2.3% of GDP. Without this decline, the actual deficit would be 10.4% of GDP.
The economy is not improving. Domestic activity is contracting and jobs will continue to be lost. Government finances are not improving- they are deteriorating. Apparently, An Taoiseach and others are ‘keen to talk about investment’ with the new French President. But it is only by the disastrous method of cutting investment in Ireland that a new sharp upsurge in the deficit has been temporarily postponed. Even so, both the SD and the actual deficit are rising.
‘Austerity’ isn’t working, even in terms of deficit-reduction.