THE REPUBLIC will borrow more money to fund capital projects as the economy slows, but the country is not in recession, Minister for Finance Brian Lenihan said yesterday.
Economists believe €184 billion earmarked to bring infrastructure up to speed through the National Development Plan will be crucial to keeping the economy ticking over and sustaining competitiveness.
"Because of the construction slump, tax receipts have been weak this year and very tight control will have to be maintained on current government expenditure this year and next year," Mr Lenihan said in an interview with Reuters.
"Clearly, going forward, we are going to have to fund more of our capital works as a government out of borrowing again - that is clear in the present climate," Mr Lenihan said.
The Department of Finance has projected a budget deficit of €4.87 billion at the end of this year and sees it rising to €5.83 billion in 2009. But economists are now expecting the budget deficit to be much higher.
The Republic tapped the bond market in April for €7 billion to help finance the projected deficit this year.
The prospect of further borrowing may not be welcomed by the European Central Bank, which yesterday voiced concerns about widening deficits across the euro-zone.
The bank said governments' attempts to stimulate economic growth by running up budget deficits could end up putting extra pressure on inflation and wage costs.
New figures showed wage growth was picking up at the same time as productivity growth was slowing, putting pressure on unit labour costs, the ECB said.
"In order to assess potential risks to inflation, wage developments will thus need to remain under close scrutiny," the ECB said in its June monthly bulletin.
Mr Lenihan said the economy would see growth this year, but on a "very modest scale".
Some economists believe the economy may already be in a technical recession, or slip into one this year, although they predict it will be a brief, shallow technicality.
"A recession implies . . . you have no economic growth or minus growth, and we don't have that in Ireland, so we are not in recession in the technical economic sense," Mr Lenihan said.
"But of course we are facing serious economic challenges."
GDP is expected to grow by just 1.6 per cent this year, according to a median forecast of 11 economists. That contrasts with 5.3 per cent recorded in 2007.
"The forecasters say it will pick up in a year or two to a better level, say 3 or 4 per cent," Mr Lenihan said. "But the phenomenal days of the Celtic Tiger - when we saw 8 or 9 per cent growth - well those days are not with us now."
Mr Lenihan said the Republic's total government debt remained low compared with other European countries.
He said fundamentals remained strong, but added there was a "painful adjustment" taking place in Ireland's property sector.
"In terms of monetary and banking stability, we are in a very good position," he said.
"We are exposed to the harsh winds that are blowing in the Anglo-American world at present." - (Reuters)
