An over-cautious budget approach

THE STATE and its agencies will spend €68.5 billion next year, according to this week’s Budget

THE STATE and its agencies will spend €68.5 billion next year, according to this week’s Budget. Total revenue is expected to amount to €54.9 billion. If both targets are met, the general government budget deficit will fall from €15.6 billion this year to €13.6 billion in 2012. This will amount to the fifth consecutive year of unsustainably large gaps between the State’s income and its outlay.

These accumulated deficits, which are considerably larger than the bank rescue costs, but greatly exacerbated by them, have locked the State out of the bond market and forced it to depend on charity. Eliminating deficits and cutting the mountain of public debt to a sustainable level will take at least a decade, but if the Government can meet its targets for next year there is a good chance that it will convince the world that it is on the right path. It is still possible that the State’s creditworthiness will be sufficiently improved to begin the process of weaning itself off bailout funds and back to normal market funding.

But in common with households and businesses budgeting for the year ahead, the Government faces a great deal of uncertainty. Even in the four weeks between the time the Coalition agreed the size of the budgetary adjustment in early November and the finalisation of the detail on how this adjustment would be achieved this week, the skies over Europe darkened. Growth has halted. The banking system is at risk of cardiac arrest. Concerns for the future of the euro have reached new heights. The risk of recession or worse is real.

Even if the Government meets both its spending and revenue targets next year, its forecast for gross domestic product, of 2.5 per cent in cash terms and 1.3 per cent when adjusted for inflation, will have to be reached, otherwise the budget deficit (of €13.6 billion) will exceed 8.6 per cent of GDP – the upper limit allowed under the terms of the EU-IMF bailout and, incidentally, by far the highest projected deficit among the 27 countries of the EU. Given the deteriorating external conditions in Europe, including in our single largest trading partner, Britain, the economic forecasts underpinning Budget 2012 look more optimistic almost by the day.

READ MORE

It may be that resolution of the euro crisis today unleashes a return to growth across the Continent. But even if EU leaders take measures that are convincing – and hopes that they will do so have dimmed over the course of the week – it is likely that some time will be required before economic momentum returns. More likely still is that the euro crisis will rumble on into the new year. Given these uncertainties the Government was too cautious in the size of the adjustment.

Ireland’s budget adjustment next year is considerably smaller than those of either Greece or Portugal, the other two euro area member states being bailed out. There was and is scope to take more aggressive action to shrink the deficit. But ultimately, whether Budget 2012 succeeds in meeting its deficit target will depend more than anything else on economic growth. At this juncture missing the target seems more likely than meeting it.