Decline in 2009 GDP ‘will make it hard to cut deficit’

THE decline in the nominal value of the economy (GDP) in 2009 will make it more difficult for the Government to reduce the budget deficit to below 3% before 2014.

NCB economist Brian Devine said “the most significant figure in the national accounts” issued last week was the downward revision of nominal GDP in 2009 from €163.5 billion to €159.6bn. This year’s budget was based on an estimated 2009 GDP figure of €164bn, he said.

With that figure now cut by nearly €4bn for 2010 that changes the budget projections because the deficit is likely to be larger proportionately than the GDP figure, he said.

Devine said he expects the Government will still be roughly in line with its underlying nominal deficit target of €18.8bn in 2010 thanks to greater than forecast “real GDP growth”.

While the underlying deficit may be met “we forecast that the general government deficit as a percentage is going to reach 20.2%”, he said.

The difference between that figure and the underlying deficit is the transfer of capital, via promissory notes, to Anglo Irish Bank primarily, but also (Irish) Nationwide,” he said.

Eurostat has still to decide whether these instruments form part of the deficit or not, he said.

The EU’s ruling that last year’s transfer of €4bn by the state to Anglo should be included in the deficit figures suggests this will be the case and that will result in the distortion of the deficit.

As such, the debt to GDP ratio will reach 87% by the end of 2010 before peaking at just over 100% in 2013, assuming the Government sees through in full the outlined fiscal consolidation, Devine added.


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