EU pressure to cut budgets ‘should be less’

EU pressure to continue cutting Government budgets when the bailout programme ends should be slightly less than expected, officials confirmed in Brussels.

Ireland and other eurozone countries legally signed up last year to the fiscal compact that includes running a balanced government budget with a structural deficit of no more than 0.5% of GDP.

Experts are planning to change the formulas they use to calculate a country’s structural deficit — which is supposed to represent the real overspend by government once cyclical elements, such as high growth, are taken into account.

The big winner from the changed methodology will be Spain because its “normal” employment rate has been assumed to be around 23%, even in good times, which distorts the deficit calculations. Its estimated structural deficit could be halved this year and cut by two-thirds next year, say Spanish officials.

Other crisis-stricken countries however will also benefit, officials from the European Council said, adding that for Ireland the benefit might be marginal. They expect a decision next week and the new formula applied from the autumn.

UCC economist Seamus Coffey said the change could have an impact on Ireland post-2015, but it is difficult to see that it would be significant.

“As a result of the massive debt accumulation over the past few years Irish budgetary policy is going to have to be tight regardless of what happens to the measurement of the structural deficit,” he said.

The Department of Finance estimates the structural balance for 2015 at -2.9% of GDP at which point Ireland leaves the excessive deficit procedure focused on reducing the deficit to under 3% of GDP.

Then, under the compact, the Government must shave at least 0.5 percentage points of GDP a year off the budget overspend to bring it to 0%, which the department estimates will be reached by 2020.

“This is a relatively slow rate of adjustment and the level of ‘austerity’ required to achieve this will be very modest compared to what is happening now. Neutral budgets and a reasonable growth performance over those years could do most of the work,” said Mr Coffey.

Finance Minister Michael Noonan told the Dáil last year that reducing the structural element of the deficit would require policy action and not necessarily tax and spending adjustments. The Government intended to use other measures. “Such measures include labour market reforms, together with investment in technology and infrastructure.”