Republic given 3 years to correct deficit

IRELAND could be given three or more years to get its budget overshoot down to 3% when the European Commission evaluates the country’s economy on Monday.

Economics commissioner Joaquim Almunia underlined yesterday that he will be flexible in applying the Stability and Growth Pact to countries that breach the rules.

Ireland’s deficit this year will be 6.5% of GDP and normally countries have to reduce their deficit by at least 0.5% a year but this will depend on growth and income forecasts.

Since economists expect the deficit to grow further next year and that growth will not return until 2010, the pact rules allow the commission to give more time for the country to come back to the maximum permitted deficit of 3%.

However, the commission will not rely on the figures they receive from the Department of Finance but will carry out more detailed studies over the coming months, an official said.

They will be unwilling to accept one-off methods of reducing the deficit — such as selling state companies — but will consider the quality of whatever methods are proposed. “We need quality because we need the correction to be durable,” an official explained.

While they may be willing to allow the country to reduce the budget by the minimum in the first year or even two, they will expect bigger cuts as growth returns.

However, Ireland is unlikely to escape formal action against it that would have to be agreed by Finance ministers of the other member states. The final sanction would be a fine.

Mr Almunia said that if a country’s deficit goes over 3% due to an unusual event, such as the economic downturn and is expected to be temporary, no action will be taken.

“If not we will open the excessive deficit procedure and in the way we draft any deadlines for adjustments and in the adjustments we ask to be made, the recommendations will take into account the special circumstances and give adequate deadlines,” he said.

Ireland will not be the only country to have a budget deficit exceeding 3% when the commission releases its economic forecast for the next two years on Monday.