Department of Finance warned ministers viability of State was at risk

The Department of Finance warned ministers in the run-up to the 2010 budget that the viability of the State could be undermined by a soaring exchequer deficit.

Official government papers show the Department of Finance told the then cabinet in a memorandum marked “secret” that without remedial action the deficit could grow to more than 14 per cent of gross domestic product in 2010.

“National debt is rising fast and, without action, will become unsustainable. Failure to take action now means that we risk a vicious circle whereby ever-more unpalatable decisions will have to be made just to service the debt,” the memo, dated October 8th, 2009, stated.

Confidential

The budgetary strategy memorandum, drawn up for consideration by members of the Fianna Fáil/Green administration, was released yesterday by the Department of the Taoiseach under the revised Freedom of Information Act. This allows for previously confidential government papers to be made available after five years.

The memorandum said tax revenue for 2009 would be €2 billion less than forecast.

It said a general government deficit of 12 per cent of GDP was likely for the year, rather than the planned rate of 10.75 per cent.

It estimated €4 billion in “measures” would be needed to stabilise the deficit at about 12 per cent for 2010.

In the memo, the then minister for finance, Brian Lenihan, told ministers the national debt, which had been €50 billion at the end of 2008, was set to hit €100 billion by the end of 2010.

“Debt servicing as a percentage of tax revenue is rising at an alarming rate, implying further much-harsher measures in future years if the issue is not addressed now,” Mr Lenihan said.

He argued there was little scope for increases in the overall level of taxation.

He said raising taxes was not desirable at that time as it would “undermine confidence, further discourage work effort and put a more general economic recovery at risk”.

Expenditure cuts

Mr Lenihan said cuts of at least €3 billion were needed on the current expenditure side for the budget of 2010.

He also suggested that cuts of €1 billion should be earmarked from capital expenditure.

The memorandum shows that among proposed cuts considered by ministers in the run-up to the 2010 budget were some which featured in subsequent budgets.