Further €4bn in adjustments urged

THE Government has been urged to make an extra €4 billion in adjustments above those already planned over the next four years.

Doing so would help restore Ireland’s creditworthiness, the Fiscal Advisory Council has said.

The council is a new body established under the terms of the EU-IMF bailout to independently assess Government budgetary policy.

It wants the Government to introduce austerity measures of €15.8bn over the next four years rather than the €11.8bn currently envisaged — an additional €4bn.

The council says the Government should start the process with a €4.4bn correction in the December budget rather than the €3.6bn adjustment originally anticipated.

Finance Minister Michael Noonan has already admitted that a correction greater than €3.6bn might be required, with coalition sources anticipating a €4bn figure.

This is because, under the terms of the bailout, the Government is obliged to cut the deficit to 8.6% of GDP via Budget 2012.

The council, in its first report yesterday, confirmed that the €3.6bn figure would not meet the 8.6% target and that it would take a correction of €4bn to reach it.

But it pushed the Government to go further, saying a bigger adjustment in this and successive budgets would have a positive effect on the country’s reputation abroad.

“This suggestion is not made lightly, given the major painful adjustment measures already taken since 2008,” the council said. “On balance, however, the council believes that a more rapid restoration of sound public finances, as well as being highly desirable in its own right, will have important favourable effects on the country’s creditworthiness.”

The council also warned the Government not to reduce its “margins of manoeuvre” by putting tax rates, social welfare rates and public sector pay rates “out of bounds” for adjustments.

But that advice — as well as the recommendation to cut faster — may prove politically unpalatable for the Government.

Public Expenditure Minister Brendan Howlin made clear yesterday that the coalition intends sticking by the Croke Park Agreement, under which no further public service pay cuts will be made provided reforms take place.

The Taoiseach has already pledged not to raise income tax rates in the budget, provided the EU and IMF agree.

The Government has also pledged not to reduce the main social welfare rates. There is also conflicting views within the troika about the merits of a more rapid fiscal adjustment.

The IMF has advised the Government to stick to the 8.6% deficit target for 2012 but the EU wants the coalition to go further — like the Fiscal Council.

But Sinn Féin said yesterday that anybody pushing for greater adjustments was “not living in the real world”.