The first €5 billion of Ireland’s EU-IMF bailout will be delivered to the Government next Wednesday after a positive reception in the markets to the European Commission’s inaugural bond issue under the rescue plan.
The Department of Finance yesterday confirmed that Government spending continued to significantly exceed tax revenues in 2010. The exchequer deficit stood at €18.7 billion at the end of the year, its data shows.
Michael McGrath, an assistant secretary at the department, said it had “notified our European and IMF colleagues” of the exchequer data yesterday “as a matter of courtesy”.
The figures show that tax receipts in 2010 were €700 million ahead of expectations at €31.75 billion, but down 3.9 per cent on the previous year, while Government spending of €46.4 billion was down 1.5 per cent compared to 2009.
Although the exchequer deficit is lower now than it was at the end of 2009, much of the reduction is due to the fact that payments made to the National Pensions Reserve Fund (NPRF) and Anglo Irish Bank in 2009 were not repeated last year.
The strong investor demand for the bond sale by the commission paves the way for a follow-on bond issue towards the end of this month by a separate fund which will lend to the Government on behalf of euro-zone member states.
Despite the positive reception as the European authorities set about borrowing some €34 billion for the Irish bailout this year, a decision by the Swiss National Bank to stop accepting Irish bonds as security pointed to a continuing lack of confidence in Ireland.
However, a commission spokeswoman in Brussels said the Irish transaction “leads us to believe that future sales will be placed without difficulty”.
The Government will receive the €5 billion five working days after yesterday’s bond sale.
The annual interest the commission pays for borrowing the money will be 2.59 per cent. The commission adds a 2.925 percentage point annual surcharge to that rate when lending the money on to Ireland, meaning the Government will pay annual interest of some 5.51 per cent for the loan.
This is a little below the 5.7 per cent projected average interest rate on all bailout loans, a rate criticised as far too high by the Opposition in the wake of the rescue.
The commission has rejected criticism of the surcharge, arguing that the bailout loans were still priced at a considerable discount to prevailing market rates. Irish five-year bonds traded yesterday between 7.6 per cent and 7.8 per cent and the interest rate on 10-year bonds was close to 9 per cent.
When the rescue scheme was set up, EU leaders insisted on "dissuasive" costs being built into any bailout to encourage weakened governments to hasten their return to private markets.
The bond sale was three times oversubscribed and was seen as a key test of market sentiment towards the Irish bailout.
It was also the first under the rescue scheme for any distressed euro country which was established last May in the wake of the Greek bailout.
The Government expects the cost of servicing the national debt to rise to €4.8 billion this year, up from €4.1 billion in 2010, the Department of Finance reiterated yesterday.
This means about 14 per cent of the estimated amount of tax revenues collected this year will be used to pay interest on the State’s debts, it said.
In a statement, Minister for Finance Brian Lenihan said the higher than expected tax receipts, driven largely by a surge in corporation tax revenues, provided further evidence that the public finances were stabilising.
However, the Opposition pointed to a two-speed economy, noting that the buoyancy of corporation tax, which came largely from the export sector, was not repeated in income tax. The take in this category fell 2.2 per cent or €254 million behind target and was down 4.7 per cent compared to 2009.
The Department of Finance expects receipts from income tax to be flat this year, once the effects of Budget 2011 measures are stripped out. This reflects the belief that the labour market will continue to be weak in the year ahead, but without seeing a repeat of the surges in unemployment of the last two years.
Fine Gael finance spokesman Michael Noonan said the figures showed “a deeply divided economy, with the multinational sector recovering but families facing even more hardship”.