Honohan says budget cuts need to exceed €3bn


THE GOVERNOR of the Central Bank has indicated he believes the December budget should involve a package of cuts in excess of €3 billion so Ireland can keep reducing its deficit on track.

Prof Patrick Honohan said yesterday the Government’s multi-year plan for reducing the deficit needed “explicit reprogramming” and this was “clearly necessary soon”. He did not want to go into detail for any given year, but there was an overall need for reprogramming.

His “overarching” interest was in ensuring that the rate of interest Ireland must pay on its borrowings was not damaged by a market perception that the Government “might not be going to deliver on what it is going to deliver”.

He told a meeting of banking regulators and academics in the national convention centre in Dublin yesterday that he had been looking closely at the “multi-year prospects for the budget” recently.

If the economy stayed on track with what had been initially envisaged, the deficit would come close to 3 per cent by 2014. “But as the IMF and others have noted, the real economy, the price level and interest rates on Government borrowing have evolved in a less favourable way. Servicing of the additional debt related to bank restructuring is also a negative factor.”

Recent increases to Ireland’s interest rate demonstrated the costs that resulted if markets were not convinced the budget was going to be kept on a convergent path “as, indeed, the Government is committed to ensuring”.

He believed there was no question but that for small, financially stressed countries such as Ireland, national growth was best served by ensuring public finances were on a convincing convergent path.

“The impact on funding costs and confidence surely more than offsets any short-term adverse impact on domestic demand from lower net public spending.”

People needed to see “clarity and certainty” about the current budget strategy, and that meant going into details as well as outlining broad magnitudes. “I think we will see it. I am expecting to see it.” He expects the markets to find the strategy convincing.

Prof Honohan said during the 1980s Ireland paid a high price in terms of borrowing costs because markets feared a much steeper exchange rate depreciation than actually occurred. An equilibrium of pessimism displaced what should have been an equilibrium of self-fulfilling optimism.

“It is important now to reset the fiscal path to ensure a virtuous cycle of lower borrowing rates contributing to even faster fiscal adjustment and a lower overall cost of adjustment to society at large.”

Prof Honohan was addressing the SUERF European Money and Finance conference, where he considered the impact of the banking crisis on national budgets, and the impact of budgetary matters on the banking sector.

In the latter regard, he mentioned the impact high interest rates on sovereign debt have on the funding costs of home banks, as well as the issue of banks holding cross-border sovereign debt, a matter which he thought was “greatly overplayed” by market participants recently.