€3bn in cuts not enough - Sutherland

Sat, Sep 25, 2010, 01:00

PETER SUTHERLAND, the chairman of Goldman Sachs International and former European commissioner, said yesterday that the Government may need to cut the annual budget by more than €3 billion this year.

Speaking to an Institute of Directors’ lunch in Dublin, Mr Sutherland said the alternative was “much greater pain” through higher borrowing costs if the Government fails to act decisively to fix the State’s finances.

“The figure of €3 billion has been postulated as the improvement to be sought in the next budget,” he said. “We are told that this is all that the political system can bear, but if all the mainstream political parties accept that more is required – although disagreeing perhaps about where to find the €3 billion – and are prepared to say it, we can find a way.”

Mr Sutherland argued against a slower rate of budget cuts, saying that “this simply will not fly as an option. Any weakness in one budget will be punished by the market in a manner which we will be unable to take.”

Mr Sutherland said a default on State debts would leave the Government without the capacity to manage its affairs or raise finance. “It simply is not an option to choose,” he said.

Mr Sutherland, chairman of oil giant BP until last year and former attorney general of Ireland, warned there was “no way” the country could walk away from the cost of Anglo Irish Bank.

He criticised repeated calls by the Financial Times – echoed by other commentators – for the Government to let the bank’s losses fall on the institution’s bondholders.

The newspaper has, among others, put forward “the classical market economist case”, he said, warning that removing protection for Anglo bondholders might not be a wise course of action.

Mr Sutherland said the national debt was rising “at an alarming rate” due to Government spending and this was overlooked in the public debate by the “constant and intense focus” on the bank crisis.

The two issues needed to be separated, he said – the country’s running costs were “still far too high” and were way above the European average in the public sector.

“We have to recognise that as currency devaluation is not an option, downward flexibility in wages and prices is essential to avoid unemployment,” he said.