Commission raises Ireland’s deficit forecast

Shortfall expected to be 7.5 per cent of GDP this year


The European Commission has increased its forecast for Ireland’s exchequer deficit for this year, in part due to the higher-than-expected costs of liquidating the Irish Bank Resolution Corp.

According to the commission Ireland’s deficit will be 7.5 per cent of gross domestic product this year, higher than its February forecast of 7.3 per cent.

The Department of Finance said this was almost in line with its prediction of a 7.4 per cent deficit.

The commission expects the deficit to narrow to 4.3 per cent next year as the Government pushes on with austerity measures, the commission said.

It also predicted growth in the economy of 1.1 per cent this year, accelerating to 2.2 per cent next year, in line with an earlier forecast.

As part of the liquidation of the bank, the Central Bank exchanged promissory notes previously held by IBRC for €25 billion in Irish government bonds.

As a result Ireland’s total outstanding long-term government debt increased by €25.1 billion, or by 27.8 per cent, from January to €115.4 billion in February, according to latest figures from the Central Bank.

The commission also predicted the euro-area economy will shrink more than previously expected in 2013 as part of a two-year slump that has pushed up unemployment to a record.

Gross domestic product in the 17-nation region will fall 0.4 per cent this year, compared with a February prediction of a 0.3 per cent, the Brussels-based commission said today. This follows a 0.6 per cent contraction in 2012 and shows the region headed for its first ever back-to-back years of falling output.

France, now projected to shrink 0.1 per cent instead of growing by the same amount, joined seven other euro-area economies expected to contract this year. Growth across the currency area will return too slowly to reduce unemployment, as the euro area remains dependent on exports to offset the impact of the sovereign debt crisis and banking woes, the EU said.

"In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe," said EU economic and monetary affairs commissioner Olli Rehn. He called for the EU to undertake "structural reforms" to bring back jobs and said budget consolidation will continue at a slower pace. Unemployment is expected to climb to 12.2 per cent in 2013, up from 11.4 per cent last year.

An "increasing labour-market mismatch" will keep the jobless rate high in the medium term and bodes poorly for those who have been out of work for extended periods, according to the EU report.

The European Central Bank yesterday lowered its key interest rate to a record low, the first rate cut since July last year. Policy makers meeting in Bratislava lowered the main refinancing rate to 0.5 per cent from 0.75 per cent, taking the ECB closer to exhausting its conventional policy tools. Falling interest rates for the EU as a whole have "not yet fed through to the real economy," the commission said.

It also flagged risks that growth could be even lower than currently projected if nations slow their structural reforms, if extra budget cuts further damp output or if the euro appreciates and hurts exports