Government faces 'unpopular choices'

Ireland must maintain momentum in making cuts in public expenditure, and the Government is facing "unpopular choices" to reach its deficit targets, economists said today.

A report from Goodbody Stockbrokers said savings could be made in the departments of social welfare, health and education.

It said the public pay and pensions bill could also be examined to see if there was any scope for cutbacks.

"If the Government is to reach its 3 per cent of GDP deficit target by 2015 and put the State back on a sustainable debt path they will have to maintain the momentum of the adjustment already in train and that will mean making some unpopular choices," economists Juliet Tennent and Dermot O'Leary said.

They said hard work lay ahead to ensure the necessary fiscal consolidation was put in place.

The economy is still living beyond its means, the report said. Although Ireland's public spending is no longer low, the economy remains low-tax.

There have been some positives for the economy, including a reduction in the interest bill on Ireland's bailout and a return to economic growth in the second quarter of the year, but Goodbody warned there are risks to taxation revenue that the Government has projected and budgeted for.

"A slowing international backdrop creates risks to meeting tax revenue projections. In our view, these should not be replaced with further tax increases. With expenditure out of kilter with the euro-area, the momentum needs to be maintained on the cost side and current adjustments of €6 billion need to be implemented," the report said.

Goodbody's economists warned that the departments of health and social protection could be the focus of the comprehensive spending review, with the two combined predicted to account for 65 per cent of total gross current spending this year.

Public sector pay and pensions, meanwhile, is expected to reach €18.6 billion in 2011. Goodbody said it may be difficult for the State to avoid further cuts in the public sector, although any adjustments could be delayed as other avenues are explored.

"If the Government is to stick to the Croke Park agreement, savings made to the pay and pensions' bill can only be made through a voluntary reduction in the overall numbers, limiting the Government's flexibility in this area," the report said.

"To avoid future pension liabilities from becoming too onerous, a change to the indexing may be necessary, particularly in light of the demise of the National Pension Reserve Fund."