Research institute offers grim economic forecast

PT sees government stimulus measures as misdirected and ineffected

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The Labour Institute for Economic Research (PT) warns that state stimulus measures have been misdirected, and predicts that they will prove to be quite ineffective.
     More effective than cutting taxes would be support for demand and investments, PT says in its economic forecast, which is the grimmest of its kind in recent times.
     PT expects the number of unemployed to increase by a total of 100,000 over the next two years. Next year the institute expects there to be 234,000 jobless, raising the unemployment rate to 8.8 per cent.
     
PT expects total production output to decline this year by 3.7 per cent, and by less than one per cent next year.
     The deep slump and tax cuts are expected to reduce state revenues, leading to a public deficit in proportion to GDP that falls below the minimum level set forth in the EU’s growth and stability pact. PT expects public finances to show a deficit of EUR 8 billion.
     
PT does not see the financial crisis as the main reason for the recession any more. The main factor is the spiral of weakening demand, which is why the recovery measures implemented by the government - reductions in taxes and employers’ contributions - are seen as the wrong solution by PT.
     PT calculates that a tax cut worth EUR 1 billion will boost GDP by only 0.1-0.2 per cent, while spending the same amount on support for investments and consumption would raise GDP by 0.6 per cent both this year and next.
     The government’s estimate that its stimulus measures will lead to the creation of 25,000 jobs is seen by PT as “considerably exaggerated”. PT says that the increased spending could lead to 10,000 - 13,000 new jobs “at most”. If the government were to increase its spending on real targets of consumption by a couple of billion euros, PT calculates that up to 60,000 jobs could be created.
     
PT observes that banks, which are mainly foreign- owned, are not interested in state bank subsidies. Reviving demand for short-term corporate bonds with the help of the State Pension Fund is also not seen as sensible, because the main problem is lack of demand, not the availability of financing.
     The institute suggests that if the availability of credit for companies really is a problem, the state could set up its own commercial bank by providing the necessary start-up capital. The bank could finance its operations by selling bonds to pension funds and pension companies.


Previously in HS International Edition:
  Government stimulus measures aimed at halving growth in unemployment (2.2.2009)
  Government unveils stimulus package (30.1.2009)

Links:
  Labour Institute for Economic Research

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