Government planning a €6bn budget adjustment


The Government plans to frontload €6 billion of its planned €15 billion four-year adjustment into the budget for next year, the Department of Finance has announced.

The majority of the adjustment for 2011 is to take place on the expenditure side, the Department said, admitting the plan would have a “negative impact on the pace of economic growth”.

The Cabinet met last night to sign off on the figure for the total amount it intends to achieve in savings and taxes in next month’s budget.

In a 10-page document, released this evening, the Department set out its ambitious plan to reduce the country’s deficit to 3 per cent of GDP by 2014.

It said the €6 billion adjustment next year would reduce the rate of growth by somewhere in the region of 1.5 - 2 percentage points. As a consequence, it forecasted real GDP growth would be 1.75 per cent next year and GNP growth, arguably a more accurate measure of Ireland’s economy, would be 1 per cent.

Taoiseach Brian Cowen said the reason the Government was planning to make the most significant changes next year was to "convince people on whom we depend to fund our deficits to continue to provide finances for the State".

Mr Cowen added that the country’s budgetary target for this year was on course in terms of tax receipts and what the country is spending.

The document indicates the Government is planning to suspend interest payments for 2011 and 2012 on promissory notes it is issuing to recapitalise three Irish banks.

The measure will help keep the general government deficit below the 10 per cent level next year.

"The Irish authorities have confirmed with Eurostat that, as a result, no interest will be recorded on the promissory notes in those years, on either a cash or accrual basis," the outlook says.

The Department also cited a number reasons for the upward revision of the adjustment from €7.5 billion to €15 billion, including “the bursting of the property bubble” which it said was weighing heavily on economic activity.

It also blamed the unforeseen size of the bank bailout, now estimated at €54 billion, and the smaller overall size of the economy as reasons for the bigger adjustment.

Minister for Finance Brian Lenihan said: "I am well aware that such measures will impact on the living standards of everybody".

"But our spending and revenue must be more closely aligned. This is the only way to ensure the future economic well-being of our society."

In a radio interview on Today FM’s The Last Word this evening the Minister said he believed the country can “tackle” the problem.

Mr Lenihan said: “We can opt to do this adjustment or we can keep expressing ourselves through anger and the denial of the problem.”

“We have already done half of the adjustment that’s required by the end of this budget we will have two-thirds of the adjustment completed - €20 billion of the €30 billion - so we are in fact proceeding very well and doing very well as a country.”

The Minister admitted the country would be in a better positioned to handle the situation if it didn’t have to deal with the bailout of the banks but said the cost of that has been averaged out over a long period of time.

“In cash terms, it’s €1.5 billion a year. Even in terms in the interest bill increase for us it’s a third of that - two-thirds of it stems from the borrowing we have to do to keep this state going on a day-to-day basis. “

“We are borrowing all the time on a day-to-day basis to furnish our day-to-day expenditures. No household borrows on a day-to-day basis to buy groceries, the Irish state has been doing that since 2008 hoping something will turn up - nothing has turned up so we have a deeper correction to start bridging that gap.”

“We have huge problems in our public finances, because we are all living beyond our means in terms of the Irish state, and yes we have huge problems in our banking sector, we’ve plans to address those sectors and they are being implemented.”

“No other party and no other government would do otherwise,” he added.

In its document, the Department said the economic outlook for next year was heavily dependent on export growth which would be determined by global economic conditions.

"In terms of the advanced economies - which comprise the bulk of Ireland’s export markets - headwinds stemming from fiscal consolidation and private sector balance-sheet repair will restrain the pace of expansion next year,” it said.

Taking this into account, it predicted exports of goods and services would increase by around 5 per cent next year.

However, domestic demand was likely to fall once again next year, albeit at a more modest pace than witnessed in the previous three years.

The Department’s medium term forecast assumed a positive impact from the structural reforms planned as part of the adjustment plan.

European Central Bank President Jean Claude Trichet said today Ireland's fiscal problems were not comparable to those of Greece, which was required to seek a bailout earlier this year.

"I would not make such a comparison," Mr Trichet said in Frankfurt today. "We have situations that are very different by many means. The Irish situation is more of a commercial banks nature in comparison with the Greek situation."

Additional reporting: Agencies