Cut budget by full €3.1bn, says Europe

The Government is coming under increased pressure from the European Commission to reduce the budget, due out later this month, by the full €3.1bn.

It is cutting the forecast for growth for the year from 1.1% to 0.6% and raising the general government deficit to 7.6% of GDP compared to the target of 7.5%.

The report released to eurozone governments last month is due to come before the Eurogroup later this month, and analyses the current state of the economy and the progress of the programme.

This will be the last such compliance report before the programme officially ends in early December, and in it the commission warns that the health budget is likely to overshoot again while tax receipts, especially from Vat, are expected to fall short of targets.

Their forecast differs from that of the IMF which last week said the deficit should be about 6.8% — better than the target. The difference may be due to the institutions’ different views on the effect of the liquidation of IBRC.

The level of savings, estimated by the Government at €1bn, will depend on the country’s credit-worthiness. The commission’s report warns that the Government may have to make up any shortfall while a final decision on whether to classify AIB’s dividend payment to the State made with shares instead of cash as a deficit has not yet been made by Eurostat.

Economics Commissioner Olli Rehn said any claims that the crisis was over were premature. “There are substantial economic divergences between our member states. While the recovery is firming in some, it remains elusive in others. In many parts of Europe, unemployment remains at dramatic levels. Excessively tight lending conditions, especially for small and medium-sized enterprises, remain a very serious bottleneck to growth,” he said.

While three were increasing signs that a gradual recovery was under way, there could be no let up in reforming the European economic and social model.

With this in mind the commission would assess each country’s budget, providing “independent policy advice early enough in the budgetary process for it to be useful for national parliament”.

The commission’s role was not to veto national budgets nor does it have the power to do so, and it would not go through every budget with a fine-tooth comb. The aim is to ensure each country was on track to achieve budgetary commitments in relation to debts and deficits and to create the conditions for growth and job creation, he said.

Separately, a report by commission staff on the effects on debt dynamics of fiscal consolidation in this year’s stability and convergence programmes said it expected short-term increases in the debt ratio after consolidation. This was likely for nine countries, including Ireland, France, Greece, Portugal and Spain.

The report expected these increases would fade within a maximum three years from the beginning of the consolidation programme when financial markets behave normally.