Irish economy will return to 5% growth by 2005-2006, says commission

THE European Commission issued a broadly positive report yesterday on Ireland's economic growth and stability over the next two years.

However, they were not as upbeat about the British or Dutch economies which are predicted to run budget deficits of more than 3% of GDP in the coming year. They said France was facing a fourth year of breaching the eurozone rules.

Economic and Monetary Affairs Commissioner Pedro Solbes, giving his main conclusions on the Irish Broad Economic Policy Guidelines programme, said the macro-economic scenario seemed to be realistic.

It envisages a gradual return by 2005 2006 to growth of around 5% which the Commission believes would be sustainable in the medium term.

According to new estimates from the Department of Finance issued this month, the general government deficit of last year is now expected to be 0.1% of GDP which is 0.6 percentage points better than the target due to a tax overshoot and savings on expenditure.

The update also predicts a widening of the deficit to 1.2% of GDP on average over the years 2004 to 2006 as a result of a significant decline in the revenue ratio that will outweigh the proposed cuts in expenditure.

The deficit will increase to 1.1% of GDP in 2004 from 0.1% in 2003. This is mainly due to the mechanical effect of the one-off boost to revenues of advancing the date of payments of capital gains tax in 2003. The deficit is predicted to grow further to 1.4% in 2005 before reducing to 1.1% in 2006.

However, the cyclically-adjusted deficit remains below 1% of GDP in each year, though the Commission said this is surrounded by an unusual margin of uncertainty. They note sizeable contingency provisions for 2005 and 2006 and expect Ireland's budgets to be close-to-balance by the end of 2006 in line with eurozone policy.

Ireland has the second lowest level of general government debt in the EU at around 33% of GDP. This debt would fall over the next few years were it not for the 1% of GNP going to the National Pensions Reserve Fund.