Deficit ‘will not reach 2015 target’

IRELAND will not succeed in lowering its budget deficit to the targeted 3% of GDP level by 2015, according to Goodbody Stockbrokers.

In its outlook for the Irish economy in 2012, which was published yesterday, Goodbody said it has downgraded its forecast for growth this year, claiming the economy will only grow by around 0.7%, rather than the 1.2% it previously anticipated last September.

It said that by the target date of 2015, the country’s deficit would at best only be around 5% of GDP. Within that estimate, Goodbody expects the interest costs will rise to over 6% of GDP and 17% of total Government revenue.

“In 2011, we made the call that Europe would require Ireland to restructure its debt in some way when the country had to request further official funding in 2013,” said Goodbody’s chief economist Dermot O’Leary.

“We believe that this restructuring is now necessary if Irish debt levels are to be put on a sustainable footing. Discussions between the Irish Government, the ECB, the EU and the IMF will be important in 2012. Depending on how the restructuring occurs, there could be a significant annual saving to the Government.”

The Goodbody outlook coincided with the arrival of the troika for its latest progress report on Ireland’s recovery programme. At the end of its last visit in October, the IMF element of the troika — Ajai Chopra — said Ireland remained on course to meet its targets.

At the same time, the OECD said Ireland should try to “over-perform” in its efforts to meet its annual recovery targets and try to reduce its budget deficit ahead of schedule.

Some economists went further, suggesting a 1% of GDP target by 2015 should be the aim.

Speaking before December’s budget, Finance Minister Michael Noonan said that 2015 was not an “end-game” scenario and recovery was targeted for the long term, not just for the coming four years.

His description of a 1% GDP deficit target by 2015 as “a bridge too far” was agreed with by Mr Chopra.

In its outlook yesterday, Goodbody said the initial 3% target cannot be expected to be reached before “at least 2016”. It added that 2012 could also see a GNP decline of 0.8% and a 2.6% drop in domestic demand.

“In contrast to other programme countries, 2011 saw the Irish economy return to modest economic growth,” said Mr O’Leary. “However, it is a fragile economic recovery, totally dependent on net exports. The hurdles of stability in the banking sector, a labour market recovery and the question of debt sustainability have yet to be fully negotiated.”

He added that this year will be a pivotal one for the Irish economy, with a potential referendum on the new EU budgetary agreement and a possible return to the bond markets.

Mr O’Leary said Ireland will have to resort to the ESM — the new eurozone bailout fund — next year if borrowing costs remain high.