Government must proceed with €3.1bn in budget cuts, says ESRI

The Government must not ease up in any fiscal consolidation this year, despite growing political pressure for a softer budget, a conference heard yesterday.

At a special budget conference in Dublin yesterday organised by the ESRI, its chief economist, John FitzGerald, said the Government had to proceed with €3.1bn in budget cuts this year.

His fellow panellists, Peter Breuen, from the IMF, former government adviser Alan Ahearne and Trinity College Dublin economics professor Philip Lane, also called for the Government to stick to the existing strategy of reaching the 3% fiscal deficit by 2015.

The restructuring of the promissory notes in February created roughly €1bn in savings over the next two years. The Government plans to take €3.1bn out of the budget this year followed by €2bn next year. On current projections this level of adjustment would bring the deficit down to 2.2% by 2015.

However, the agreement with the troika is that the Government would reach a 3% of GDP budget deficit by 2015. Fine Gael’s Richard Bruton has argued that this wriggle room should be used to introduce cuts in income tax, whereas some Labour Party ministers want to ease up in spending cuts.

But Mr Lane said there is no economic model that can confidently predict the economy will reach a 2.2% deficit by 2015. He said the debate about wriggle room in the budget “had to be put in the context of gross debt reaching 123% of GDP this year”.

There is growing international consensus that austerity is doing more harm than good. Mr Lane said it may be appropriate for countries such as the US, the UK and Germany that can borrow at rock bottom prices to delay planned consolidation.

Moreover other periphery countries such as Italy, Spain, Greece and Portugal face very sharp, and potentially damaging, corrections to their public finances. However, Ireland has a much more gradual consolidation path, which should be maintained, he added.

The IMF’s Mr Breuen said there were many downside risks including higher borrowing costs because of the commitment by the US Federal Reserve to exit its quantitative easing programme. Moreover, there could be continued weakness among Ireland’s main trading partners.

“If [Irish GDP] growth remains at 1% between 2014 and 2018, which is a reasonable assumption, then the budget deficit would be 3.5% in 2015 instead of 2.5% and by 2018 debt would be 130% of GDP.”

Mr Aherne noted the Government’s plans to use the €6.4bn pension reserve as an investment fund. He said there was a danger this could be used to invest in politically motivated infrastructure projects that would have limited economic benefit.

The health of the SME sector would be the most important determinant of the recovery, although there was a debt overhang that was constraining growth, said Mr Ahearne.


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