The European Commission is preparing to extend by one year the Government’s deadline to restore stability to the public finances, a move that raises the prospect of swingeing cutbacks and taxation measures continuing into the middle of the next decade.
Although trade union leaders have called on the Government to ease spending cutbacks by extending the duration of its recovery programme beyond the current target of 2013, the commission will not give the Government any additional headroom as it seeks to impose €4 billion in cutbacks in the budget next month.
EU sources say economic and monetary affairs commissioner Joaquín Almunia will declare tomorrow that Minister for Finance Brian Lenihan is taking “effective action” to address the crisis in the public finances.
But the commissioner will also say that the deterioration in the State’s economic performance since the start of the year – due to weakening tax receipts and higher social welfare spending – is such that the Government should now be given until 2014 to reduce the budget deficit to a sustainable level.
Informed sources suggested the Government did not seek the extension, which follows a routine review by the commission under the excessive deficit procedures of the EU’s Stability and Growth Pact.
The one-year extension is in line with the parameters of the pact, under which euro zone members are obliged to keep their budget deficit within 3 per cent of gross domestic product.
Some other countries are likely to receive a similar extension tomorrow following similar case-by-case reviews, while the excessive deficit procedure may also be initiated in respect of France, Spain and Britain.
A new EU forecast last week projected that Ireland’s deficit will rise to 14.7 per cent in 2010, among the highest in the euro zone and the wider EU, from 12.5 per cent this year and 7.2 per cent in 2008.
Given the commission’s conclusion on the basis of current information that the 3 per cent target cannot be reached by 2013, further cutbacks or taxation measures will be required in the following year.
The proposed extension will have to be approved by EU finance ministers at their routine meeting next month.
The likely scale of the measures required in 2014 remains unclear. The Government is already obliged under its current agreement with the EU to follow the €4 billion package in the forthcoming budget with another €4 billion in measures in 2011, a further €4 billion in 2012 and €3 billion in 2013.
The commission said in its forecast last week that the general government deficit was expected to widen in 2009 beyond the target set in the supplementary budget last April – 10¾ per cent of GDP – largely due to weaker tax revenue growth than expected.
“Based on the no-policy-change assumption, a further worsening of the deficit is projected over the forecast horizon,” it said.
“In 2009, a series of tax-increasing measures moderated the revenue decline which followed the severe economic downturn and ongoing adjustment in the housing market.
In 2010-11, tax revenue developments are in line with expected economic growth, while also reflecting the full-year effect of measures taken in the course of 2009 (as well as the disappearance of some deficit-reducing one-off measures in 2009).
“The shift away from tax-rich domestic demand-driven growth to export-led growth, with sluggish employment and consumption growth, would lead to only a moderate tax revenue increase once the economic recovery takes hold.”
The extension comes as the EU economy at large comes out of recession, having reached a turning point after the deepest and longest recession in its history. However, Mr Almunia has warned that the outlook remained highly uncertain and subject to “non-negotiable but broadly balanced risks”.
