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The Irish economy is facing extremely challenging times. It is in the throes of a deep recession, unemployment is rising rapidly and the Irish banking system is facing serious funding difficulties. As a consequence, by the end of 2010 output per head will have fallen back to its 2001 level. Nonetheless, our analysis suggests that the potential growth rate of the economy is around 3 per cent a year. Given the very severe recession that Ireland is currently experiencing, this means that when the world economy eventually recovers the Irish economy can be expected to experience a period of above average growth. On this basis, output per head could be restored to its 2007 level by the middle of the next decade. Consistent with this forecast, our estimates suggest that there will be a permanent loss of output of 10 per cent compared to where the economy might have been. This will represent a very painful permanent “scar” on the economy arising from the current recession.

The dramatic deterioration in the public finances in 2008 and the early months of 2009 exposed the scale of the structural deficit–the deficit in the public finances which would remain even after a world recovery unless fiscal action is taken to close it. This structural deficit largely reflects the legacy of unwise fiscal policies in recent years. The experience of Ireland in the 1980s and of many other countries since then, suggests the importance of taking early action to tackle such a fiscal crisis. The budgets of 2009 and the budget promised for 2010 are together likely to halve the size of the structural deficit to 3 to 4 per cent of GDP. This seems to us to be an appropriate fiscal policy response to …