EC urges Budget cuts

 

The European Commission has said the Government should proceed with its €4 billion budget cuts package for 2010, even after it granted a one-year extension to the deadline for the recovery of stability in the Irish public finances.

It made the comments in a new review of Ireland’s economy performance under which it has extended the deadline for restore stability in the public finances by one year until 2014.

The measures set out in the Commission’s new recommendation mean the Government’s fiscal adjustments over the next five years will be the highest in the European Union.

Under a plan agreed last May, the Government was obliged to introduce an average annual structural budgetary adjustment of 1.5 per cent of gross domestic product (GDP).

In the revision agreed today the Commission says that adjustment should now rise to 2 per cent of GDP. When taken with adjustments to the cyclical budget deficit, the totality of measures introduced since July last year totals 5 per cent of GDP in the current year.

“The Commission recommends that the Government specifies consolidation measures in the Budget for 2010 in line with a package announced in the April supplementary budget, and ensures an average annual structural adjustment of 2pps [percentage points] of GDP over the period 2010 – 2014”.

“It should accelerate the reduction of the deficit if economic or budget conditions turn out better than currently expected and seize every opportunity, beyond the structural adjustments, to accelerate the reduction of the growth, debt ratio towards the 60 per cent of GDP reference value.”

Economic and monetary affairs commissioner Joaquín Almunia said the Government had taken effective action to address its fiscal problems.

However, the worsening of the economic conditions was such that a 1-year extension of the recovery programme was appropriate.

The Commission set deadlines between 2012 and 2014/15 for 13 EU countries today to cut their budget gaps below 3 per cent of GDP and said it would step up disciplinary budget action against Greece.

The announcement follows agreement by EU finance ministers yesterday to start withdrawing fiscal support to the economy from 2011 at the latest as the recovery takes a firmer hold.

Mr Almunia said cutting the deficits, inflated by the worst economic crisis since World War Two, was needed to prevent a rise in long-term interest rates that would raise the debt servicing costs.

"I believe the deadlines proposed today are appropriate and realistic," Mr Almunia said.

The Commission expects the aggregate budget deficit in the euro zone to jump to 6.4 per cent this year and 6.9 per cent next year from 2 per cent in 2008 - more than twice the EU limit of 3 per cent of gross domestic product.

This will boost euro zone debt to 78.2 per cent of GDP this year, 84 per cent in 2010 and 88.2 per cent in 2011 in a trend that could undermine the value of the shared euro currency.

The Commission, the EU executive, gave Germany, France, Spain, Austria, the Netherlands, the Czech Republic, Slovakia, Slovenia and Portugal until 2013 to bring their deficits below the 3 per cent EU limit.

The new deadlines give Ireland, France, Britain and Spain an extra year for the deficit reductions.

This is because they took action to cut deficits as requested by EU finance ministers in April, but bad economic conditions made it impossible for them to meet the targets.

Additional reporting Reuters