BUDGET:A BALLOONING State deficit and years of tough budgets lie ahead as a result of the Government's latest plan to bail out the banking sector.
Minister for Finance Brian Lenihan admitted yesterday that expectations of €3 billion in cuts in December’s 2011 budget would have to be “upped”, describing the figure as “an absolute minimum”.
He also outlined plans to publish a new four-year budgetary framework to take account of the new situation and confirmed that the State would hold back from raising cash through the bond markets until next year.
The Minister declined to elaborate on the precise level of cuts pencilled in for December’s budget, but bond economist Donal O’Mahony at Davy noted that the “take out” for 2011 was now heading for €4 billion.
Prof Patrick Honohan, governor of the Central Bank, also prepared the ground for a harsh budget, saying “€3 billion next year will not do it”.
Savings of €4 billion would go some way to easing the burden of the bailout and the State’s consequent borrowing worries. But, with the banking sector now on track to absorb €50 billion in taxpayers’ money, a cash hole has been created that will require filling for many years to come.
Mr Lenihan acknowledged yesterday there would be a “very substantial spike” in the general Government deficit this year, with supporting the banks to cost almost 20 per cent of GDP. This would leave the general Government deficit at about 32 per cent of GDP for this year, with a projected decline to below 10 per cent next year.
The date that really matters however, at least to the EU, is 2014, the point by which the State has undertaken to bring the deficit back down below the 3 per cent of GDP required in EU budgetary rules.
The path from 32 per cent to less than 3 per cent will undoubtedly be a difficult one, which can only be negotiated via cuts in spending and higher taxes, hopefully alongside an uplift in the economy.
Mr Lenihan said it was important that the State has “a credible path to show how we propose to meet this commitment”.
This will involve publishing a four-year budgetary plan early next month after the most up-to-date picture of the economy emerges in exchequer returns next week.
“I want to stress today to all, including our European partners, that Ireland remains fully committed to reducing our deficit below 3 per cent of GDP by 2014 as agreed,” Mr Lenihan said.
The State’s debt will rise to 100 per cent of GDP by the end of the year and 115 per cent by 2014. This compares to a 25 per cent debt/GDP ratio about three years ago. Prof Honohan was at pains yesterday to emphasise that just 6 percentage points of the increase can be attributed to rescuing the banks, with the remainder owing to an economy that is adrift.
The NTMA taking a break from raising money at high interest rates is in many ways an obvious response to current circumstances, with December traditionally bringing a hiatus anyway.
Mr Lenihan noted that the Exchequer is fully-funded until the middle of next year, making it possible to allow the markets this time to digest the Government’s stability framework. If all goes to plan, interest rates for Irish bonds will decline in the meantime.
Mr O’Mahony at Davy described the “optics” for 2010 as “appalling” but said the overall arrangement was “manageable”.
