More cuts in spending needed, says Barclays

THE GOVERNMENT will be forced to take “aggressive measures” beyond the spending cuts and tax hikes already implemented to bring its ballooning deficit under control, according a new report by Barclays Capital.

Analysts from the bank said “substantial” cuts in expenditure would be required to stabilise public finances. This would include “possible” further cuts in public sector pay, despite the dampening effect this would have on consumer spending and “almost certainly” cuts in public services.

As a result of the drag on economic growth that will arise from this fiscal tightening, Ireland is the only economy in the euro zone that will see three consecutive years of negative real output growth, Barclays Capital said.

Meanwhile, ratings agency Moody’s yesterday said Ireland’s Aa1 government bond ratings remained on a negative outlook, as the economy faced its most severe test in decades. Dieter Hornung, a senior analyst in Moody’s sovereign risk group, said that because Ireland’s economy was not as diversified as larger economies, it would be more exposed to swings in global trade demand.

“The country’s ability to participate in a future pick-up in global economic activity – essential for preserving its economic strength in the medium to long run – depends on its capacity to become competitive again,” he said.

The negative outlook on the Aa1 long-term government bond ratings reflects the risk of a gradual deterioration in the share of Government revenue used to service the interest on its debt, Moody’s said in its report on Ireland.

Barclays expects the Government deficit as a percentage of GDP will end 2009 at 11.1 per cent, before sinking further to 13.3 per cent in 2010. However, its forecast of a 7.1 per cent drop in real GDP this year and a further 0.3 per cent fall in 2010, is far less pessimistic than most other forecasts.

“Our relative optimism stems largely from our forecast of significant positive contribution from net exports, as the global economy recovery gains momentum in 2010, particularly from the larger Asian markets and the US,” said Ciarán Kane, head of treasury for Barclays in Ireland. “On the down side, we do feel that the level of retrenchment required in public expenditure will remain a drag on growth until 2013.”

Barclays noted Irish house prices remain the most expensive in Europe and are “especially elevated” in relation to disposable income. “There is no evidence to suggest that Irish house prices have yet reached a trough, despite the exceptionally low interest rates prevailing.”

Barclays paints a picture of a future Irish economy marked by extreme caution among consumers, following a reckless decade in which household and other private sector debt expanded at the most rapid pace in the euro zone. “With the Irish labour market deteriorating rapidly, real household disposable incomes are likely to be squeezed still further in the months ahead and precautionary savings look set to climb higher.” The squeeze on incomes could be even tighter if the next budget is as much of an “austerity budget” as expected.