Deficit looks set to stay well within EU limit

Public finances The Irish public finances will continue to obey comfortably the budgetary management rules set by the Stability and Growth Pact until at least 2006, according to forecasts released yesterday by the Department of Finance.

The Stability Programme Update, which was enclosed within the Budget documents, predicts that the Republic's General Government Deficit will stand at 1.1 per cent of GDP next year, 1.4 per cent in 2005 and 1.1 per cent in 2006.

This would leave it well within the 3 per cent outside limit set by the pact and, in effect, put a number of more mature European economies to shame. This situation would become even more stark if the Republic's investment in infrastructure were cut to the average level of other EU states.

Such a move would leave the general Government balance in surplus by some 1.5 per cent over the next couple of years.

The update also sees the Republic's ratio of debt to GDP remaining below 34 per cent until the end of 2006. This compares favourably to the current average EU debt/GDP ratio of 64 per cent, and is the second-lowest in the union.

The projections are placed against a relatively benign economic backdrop, whereby the Irish economy would gradually move towards its natural growth rate of about 5 per cent over the next three years.

The Department of Finance is forecasting GDP growth of 3.3 per cent for next year, 4.7 per cent for 2005 and 5.2 per cent for 2006.

GNP, meanwhile, which the Department defines as "a more accurate reflection of national income in Ireland", is seen growing at 3 per cent in 2004, 3.9 per cent in 2005 and 4.4 per cent in 2006.

This will occur, the Department believes, as conditions in the international economy continue to improve. It is also based on an expectation that the Republic places a key focus on its international competitiveness.

"Regaining competitiveness is a key objective of economy policy," the Department notes.

The update is not without the traditional note of caution, however. The Department warns of "significant downside risks" to its forecasts, pointing out that any setback in the international economy could have significant implications for the Republic's growth profile. It is also wary of the effects of EU enlargement, signalling that "the 10 new member-states joining the EU in 2004 may also prove a challenge to Irish exports and to inward foreign investment".