Rehn: Ireland could be facing deeper budget cuts

Ireland could be facing even deeper cuts in next year’s budget, with continuing job loses and falling domestic demand threatening the country’s fragile recovery.

European economics commissioner Olli Rehn said the depth of future cuts will depend on the troika’s next quarterly detailed analysis of the economy, due in April.

This comes on top of the change in the latest memorandum of understanding that inserted the words “at least” into the budget reduction of €3.8bn for next year. And it contradicts the Government’s expectation of 1.3% growth for 2012.

The euro area is in a mild recession, with growth forecasts having fallen from an increase of 0.5% to a drop of 0.3% for the year, which also has negative implications for Ireland’s exports.

Domestic spending, the weak spot in the country’s recovery, continues to fall for the fifth year as families pay down debts and cope with rising unemployment. This could cut spending in the real economy even more than predicted, with layoffs still due in the state and banking sectors, the commission’s forecast warns.

And while low interest rates might help alleviate some of the suffering of households, it is not expected to encourage families to begin spending anytime soon.

Numbers at work continue to fall, but this is offset in the unemployment statistics by the numbers emigrating. This trend is also forecast to continue through 2012.

Even for Irish exports — the bright spot on the country’s economic horizon — there are risks due to the euro area recession. Growth in exports is predicted to slow down from last year, but will not be as badly hit if the British and US economies continue to recover. An upturn is expected in the second half of the year, but even this comes with a warning that much depends on the global economy and domestic demand. Inflation is expected to rise slightly to 1.6% (lower than the euro area average of 2.1%) due to VAT increases and the weakness of sterling.

Asked if further cuts would be required to ensure Ireland hits its budget target of -8.6% of GDP, Mr Rehn said: “We conduct more in-depth assessments in the quarterly reviews and we will do so the next time we conduct a review.”

The commissioner was criticised for saying the Irish programme was working, despite rising unemployment and poverty.

He partly answered this by saying: “Overall, the Irish economy has been recovering. The EU/IMF programme has been helpful in this, both in terms of providing financial assistance to the sovereign and by including a very significant package of restructuring and recapitalisation of the banking sector, which has been essential in restoring confidence into the Irish economy; and thus it is crucial for the current and future improvement of growth and job creation in the country.”