Budget, bailout double blow for Coalition

The developments will heap further pressure on a Government dogged by a spate of controversies including the banking inquiry, and still reeling from heavy local and European election losses.

In IFAC’s latest fiscal assessment report, chairman John McHale said: “It is important that the Government follows through on its commitments to implement the €2bn of additional measures in 2015.”

Under the terms of the bailout programme, the Government has agreed to reduce the budget deficit below 3% by the end of next year. The European Commission said last week that €2bn in spending cuts and tax hikes would be needed to hit the target.

However, the candidates for the leadership of the Labour Party, Joan Burton and Alex White, have both pledged, if elected, to ease up on the austerity measures this year. That means budget cuts well short of €2bn.

IFAC was set up in the wake of the financial crisis to advise the Government on fiscal policy.

Ireland is still under the European Commission’s Excessive Deficit Procedure. If the Government introduces a budget of less than €2bn and subsequently misses the 3% deficit target, the commission could potentially impose penalties of up to €300m.

Ms Burton has made securing a deal on bank debt part of her campaign for the Labour leadership. However, the chances of this strategy succeeding look doomed.

A senior EU official, who has direct knowledge of plans being drawn up for an EU banking union, told the Irish Examiner that the chances of Ireland getting any money from the new bank bailout fund are a “near impossibility”.

The official acknowledged a June 2011 EU Council meeting when a commitment was made to review the €64bn the Government pumped into the banking sector to plug massive losses. However, the new EU bank bailout fund will only be used to cover bank losses in the future, he said.

Mr McHale said pushing through €2bn in budget cuts “would be politically very difficult” but there are huge risks if the 3% fiscal deficit target is missed, including a loss of investor confidence and a surge in borrowing costs.

Taoiseach Enda Kenny and Finance Minister Michael Noonan have both said they would consider lowering the tax burden on middle-income earners if there was room for manoeuvre on the budget figures.

Mr Noonan said he will wait until the end of the summer when there is more clarity on tax receipts before making a decision on the scale of the adjustment. The exchequer returns have been ahead of target for the first five months of the year.

“The news [tax revenue] so far has been reasonably encouraging, but if anybody is confident of meeting the [3%] target based on that, they are not factoring in huge uncertainty,” said Mr McHale.