The inter-relationship of it all

Michael Taft: From Ernst & Young’s Economic Eye Summer 2010 forecast, two projections scream out from the report:

First, employment levels won’t return to their pre-recession level until 2022. Yes, 2022. That’s 15 years of a jobs-recession – a decade and a half. That led the report to refer to a ‘ . . . sluggish and largely ‘jobless’ recovery’. The word ‘largely’ is an understatement.

Second, is their projection on the annual deficit. This is equally depressing but, given their employment projections, not surprising. Ernst & Young project that the Government will not only fail to reach the Maastricht deficit target of -3 percent by 2014 – they won’t reach it until 2018 or 2019.

What’s noteworthy about this deficit projection is that it is done against the background of a reasonably optimistic growth rate of 3.5 percent throughout the next decade. However, the E&Y report poses a number of caveats, especially as this growth rate rests largely on the export sector. They raise the real danger of a two-tier economy, with the domestic economy lagging even further behind. If this occurs, we might find that the deficit might (might) eventually come right statistically, but remain an unsustainably high burden for years and years to come.

Of course, this will no doubt give new impetus to the cuts brigade – those who believe you get out of a hole by digging even more. They should be aware of the following. Just after the April 2009 budget, E&Y projected that Ireland would reach the Maastricht deficit target by 2015. Now, after the December budget, they have pushed that back by three to four years. Another round of cuts could see that target pushed back even further.

The key inter-relationship is employment and the deficit. A jobless recovery will continue to impair the public finances. Responding to public finances by more spending cuts will exacerbate employment. And this, in turn, will continue to impair public finances.

Some Governments get it. This one doesn’t.