The Irish economy may not fully recover until 2014 because the Government will have to raise taxes to restore stability to the public finances, Professor John FitzGerald of the Economic and Social Research Institute told the AEJ at a lunch on Tuesday, December 2.
Professor Fitzgerald, who specialises in longer term forecasts for the ESRI, said he did not see recovery in the global economy before the end of 2009 and it was likely to be 2010 for the EU as a whole.
“Then governments will have to rescue their large budget deficits. It could be 2012 before we see a return to rapid EU growth and Ireland will lag behind that,” Mr Fitzgerald said. “Even to maintain public services at their present level will need a major increase in taxes. We had suggested a 2pc increase in the overall tax burden, but it may now need to be more than that,” he said.
“The trouble with raising income tax, or even VAT, is that it discourages work,” he continued. “I don’t expect to see a property tax, but there may be a carbon tax, given the composition of the Government. However, there is resistance to that as well, especially from the opposition parties.”
He said it would be preferable to have pay restraint in the public service rather than getting rid of large numbers of people.
“We are going to have deflation next year, with consumer prices actually falling. That makes the recent pay deal far more valuable. Even a 3pc rise in social welfare will represent a real increase of 2-4pc, depending on what happens to inflation in 2009.”
He said there could be savings on the public capital programme, because of the fall in the price of land.
“Most of the cost of infrastructure went on buying land — 50pc to 70pc of it. The Government will get a much better bargain in the next few years.”
Mr Fitzgerald said the situation was now similar to that of the 1980s and it would be five years or so before one could see what long-term damage had been done to the economy.
“I am more optimistic about the country having a bright future than I was in the 1980s but it will take time,” he added.