Bigger budget cuts may be needed this year if growth continues to slow and the tax take drops further, the European Commission will warn today.
The commission will say it is essential Ireland cuts its deficit to 8.6% of GDP as agreed — but this will put the EU’s executive arm on a collision course with the IMF, the other half of the country’s lenders.
“At the moment we do not think there is a need for additional measures in 2012, but there is some debate on what is the best way forward if there is a negative shock,” according to an EU source.
The Government has already hinted it may need to take over €3.8bn out of the economy this year after it inserted “at least” into the memorandum of understanding with the troika last month.
However, the IMF reiterated this week that it believed the economy was too fragile to cut more, and would prefer to change the 8.6% deficit target to about 9%, and make it up in the following years as growth picks up.
However, the commission believes this sends out the wrong signals to the markets and risks undermining the confidence in the economy.
“It is important that the Government meets the key target of 8.6% deficit for 2012, while the IMF favour not increasing consolidation but maintaining state spending even if tax revenues and growth is lower than set out in the programme,” said the EU source.
The growth forecast has already been revised down to 0.5% of GDP for this year but if it were to fall far below this and if tax receipts were also to drop, the commission will argue that greater savings should be made in the budget.
“It depends on what happens in the economy in the next three to four months. The latest confidence reports in the last few weeks were a little better than previously so the risk is a bit lower than it was a month or two ago,” said the source.
The commission is set to argue it is vital for Ireland’s credibility to stick doggedly to the 8.6% deficit target this year.
The effect the impending referendum will have on the markets was still unclear yesterday but Eoin Fahy, chief economist with Kleinworth Benson Investments, told Reuters: “Nobody could say that this is anything but a bad news story. What we get is a period of uncertainty that will last at least until May and with no guarantee that it will be resolved even then.”
Some analysts told Reuters that plans to resume issuing short-term debt in early summer may also be under threat.
© Irish Examiner Ltd. All rights reserved