THE GOVERNMENT will cut borrowing by €6 billion next year through a combination of spending cuts and tax increases.
The “adjustment” to be made in the coming budget was outlined in a document released yesterday that set out the economic and fiscal background to the four-year plan to return the national finances to a sustainable path.
The document, Information Note on the Economic and Budgetary Outlook 2011-2014, was released by the Department of Finance and did not break down the split between spending cuts and tax measures. These will be detailed in the four-year plan due to be published later this month.
The document did detail the scale of the adjustments that will be made over the subsequent three years. Borrowing will be cut by €3 billion to €4 billion in 2012; €3 billion to €3.5 billion in 2013; and €2 billion to €2.5 billion in 2014.
The measures are aimed at reducing annual borrowing to 3 per cent of gross domestic product – the monetary value of all economic activity – by 2014.
This is the target set under the rules of the European single currency and is seen as a sustainable level of borrowing by the European Commission.
The total adjustment of €15 billion over four years is double the €7.5 billion adjustment that the Minister for Finance predicted last year would be needed to hit the 3 per cent target.
The department said yesterday that it was forced to revise the figure because the economy had not grown as strongly as had been hoped due to a number of factors, including a slower than expected international recovery.
The department said the spending cuts and tax rises required under the plan would further reduce growth by curbing spending by Government departments and individuals.
The €6 billion adjustment pencilled in for next year will reduce growth by between 1.5 and 2 percentage points, they warned.
Officials also cautioned that the impact could be greater if public confidence is damaged further. They said that households may choose to repay existing borrowings rather than spend. The document predicts the economy will grow by 0.25 per cent this year and 1.75 per cent next year after the €6 billion adjustment.
Employment will decrease slightly but unemployment will also fall by 0.25 percentage points to 13.25 per cent. Some 100,000 people are expected to emigrate during the four years covered by the plan, with 45,000 expected to leave next year, followed by 25,000 in 2012.
The Government is being forced to take such drastic action because the international bond markets are losing confidence in Ireland’s ability to repay the money it has to borrow to bridge the gap between spending and revenues.
Negative sentiment towards Ireland has been reflected in the nominal price Ireland would pay to borrow on international markets. It is currently higher than 7 per cent, about 5 percentage points above than the rate paid by Germany. The documents released yesterday show the Government is assuming the rate will only fall to 6.5 per cent next year and 4.7 per cent thereafter, which is close to the average in the last two years.
The gap between spending and revenues will be more than €50 billion this year and includes more than €30 billion that will be used to meet losses at Anglo Irish Bank and Irish Nationwide. This represents 32 per cent of GDP.
When the cost of propping up the banks is stripped out the “underlying” deficit is just under 12 per cent of GDP. The gap is expected to fall to €15 billion next year – about 9.5 per cent of GNP – reflecting the €6 billion adjustment and the Government’s belief that it will not have to inject any more funds into the banks.
