Is austerity working? YES

UNDER current projections, the Government’s budget deficit will decline to 2.2% of GDP by 2015 if it sticks to the agreed plan to implement adjustment packages of €3.1bn in 2014 and €2bn in 2015.

Since this is substantially below the 3% of GDP ceiling that is enshrined in EU guidelines, there is now speculation that the Government will slow down the pace of fiscal adjustment in Budget 2014.

However, there are several compelling reasons to stick to the original plan. Most important, the market will the sole funding source for the Government once the troika leaves later this year. The interest rate charged to the Government on its borrowings will depend on the level of confidence of investors in the Government’s willingness to service its debts in the years ahead. The postponement of the agreed fiscal package would add to the amounts that Ireland will need to borrow from market investors and create uncertainty about the Government’s determination to complete the austerity programme. As an example, we have seen the market interest rate on Portugal’s sovereign debt climb rapidly in recent weeks as its political crisis has created new doubts about its willingness to reduce its deficit.