Lenihan predicts economy to shrink by 4% in 2009

The Government's end-of-year returns have shown a tax revenue shortfall of €8.13 billion, it was confirmed this afternoon

The Government's end-of-year returns have shown a tax revenue shortfall of €8.13 billion, it was confirmed this afternoon. Publishing the worse-than-anticipated figures today, Minister for Finance Brian Lenihan predicated the economy would shrink by a further four per cent this year and said that “decisive and sustained” Government action was urgently required.

The revenue shortfall had been forecast to be around €6.5 billion as recently as early October when Mr Lenihan unveiled his first budget as finance minister. A worse than expected decline in revenue in November and December was responsible for the worsening state of the economy, he said.

At a press conference this afternoon in Dublin officials from the Department of Finance set out the position in terms of revenue, borrowing and expenditure for the last year to December 31st and said there was a tax shortfall of €8.133 billion in 2008 compared with a shortfall of €1.82 billion in 2007.

Mr Lenihan said the returns were in line with the projections outlined at the start of December and said they reflected "the fact that, both domestically and internationally, economic conditions are poor".

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Exchequer borrowing for 2008 stood at €12.7 billion, substantially higher than anticipated . The General Government Debt to GDP ratio was just over 41 per cent, up from just under 25 per cent at end 2007. Net of the assets of the National Pension Reserve Fund and the significant cash balances held by the National Treasury Management Agency, the end-2008 figure is approximately 20 per cent of GDP.

"Overall, these Exchequer returns, combined with economic data published since the Budget, confirm that the outlook for next year has deteriorated. I recently indicated that economic activity in 2009 will contract by significantly more than generally anticipated at Budget time last October. Contraction in economic activity in 2009 of somewhere in the region of 4 per cent is now likely.” Mr Lenihan confirmed.

“When the Government meets later this week it will consider the revised economic and fiscal assessment from the Department of Finance. I plan to publish these revised forecasts shortly thereafter," Mr Lenihan said.

He said the Government's first priority was to stabilise the public finances and to restore sustainability to them. "There is no doubt that this will be very challenging. With proper handling, however, we can position ourselves so as to benefit from the global economy recovery when it happens. This requires decisive and sustained action over and the Government is committed to take the necessary and proportionate actions in that context."

Fine Gael deputy leader and finance spokesman Richard Bruton called on Taoiseach Brian Cowen to take immediate action to deal with the economic crisis adding that the October Budget had failed to have any affect on the situation.

"The figures expose the hopeless inadequacy of the Budget which was put together in October. It had inept measures and now we've seen it was built on completely flawed numbers," said Mr Bruton.

“This is a Government with an adequate majority with plenty of support to come up with its proposals. It’s time we saw them,” he told RTÉ radio.

Mr Bruton said, among other measures, health service cuts were needed. “There has to be cuts in administration so that we can protect the front line,” he said.

Labour deputy leader and finance spokeswoman Joan Burton has called for the Dáil to be brought back early for a special two-day session on the banks and the economy. Deputies will convene on January 20th to mark the 90th anniversary of the first Dáil in 1919 and Ms Burton wants this extended by a further two days instead of adjourning until January 27th.

The forthcoming talks with the social partners are officially focused on the Government's economic recovery programme but the Taoiseach indicated strongly yesterday that all items would be on the agenda including the national pay deal.

Sinn Féin finance spokesperson Arthur Morgan called for the Government to implement a job creation strategy to include a programme to build public infrastructure such as schools and hospitals, rather than cutting public services to cover the shortfall.