By Sarah Collins in Brussels
Thursday March 18 2010
IRELAND’S plans to bring spending and borrowing under control may require deeper cuts than previously forecast, the European Commission said yesterday, as it demanded that Finance Minister Brian Lenihan take action on public sector pensions and provide more details about plans for further cuts over the next few years.
The commission said in the report that the Government’s plan to slash the budget deficit by eight percentage points over the next four years is overly optimistic and lacks detail. Ireland is currently running a budget deficit that is four times the EU’s limit but has promised to bring it below 3pc of gross domestic product by 2014.
“The budgetary outcomes could be worse than targeted in 2010 and considerably worse than targeted thereafter,” said the report.
“The authorities should stand ready to take additional measures beyond the planned consolidation packages in case growth turned out to be lower than projected in the programme.”
The biggest problem is the Government’s prediction that the economy will expand 3.3pc next year.
The commission’s forecast sees the economy growing by just 2.6pc.
The commission also says there are risks the 2010 Budget could fall victim to spending “slippages”, not least because of injections that could be called in to shore up the country’s banks.
Mr Lenihan did not set aside money to pay for any further cash injections into the country’s banks this year, despite widespread expectations that Allied Irish Banks, Bank of Ireland and Anglo Irish will all require billions of euros.
EU officials said Ireland’s adjustment process will be “rather drawn out” and that emigration and high interest rates on government debt could wear on the economy. The present plans would only stabilise government debt by 2020.
“Specific additional risks relate to the government’s bank guarantees to support the financial sector, which, if called, would lead to increases in deficit and debt,” it says.
It also told the Department of Finance to spell out how it will slash the deficit by three percentage points in 2012 and a further two points in 2013 and 2014 to bring it below the EU’s limit.
The department also needs to provide more data to explain some of its calculations, it adds. Revenue and expenditure projections are “technical” rather than being targets, it says.
“From 2011 on, taking into account the risks to the deficit targets, the budgetary strategy may not be consistent with the (EU) recommendation. In particular, the deficit targets for 2011-2014 need to be backed up by concrete measures and the plans for the entire period need to be strengthened,” the report says.
The call for the Government to strengthen the “binding nature of the medium-term budgetary framework” appears to be a demand for Ireland to make plans beyond the traditional scope of budgets here.
A government spokesman said yesterday that specific extra cuts or tax rises would be announced in relevant budgets, when it would take account of the then-prevailing economic circumstances.
The commission says the Government should introduce more public sector pension reform to improve the long-term sustainability of the public finances.
“The long-term budgetary impact of ageing is clearly higher than the EU average,” the report says.
The report adds that the Government should also consider plugging holes in the budget by widening its tax base. It says the effects of the new carbon tax will be negated by cuts in VAT rates.
“The sharp decline in revenue recorded in the context of the housing market correction and the wider recession has revealed some vulnerabilities of the Irish tax system, such as a narrow tax base and a high reliance on taxing transactions in assets,” the report says. Ireland is one of 20 member states under increased scrutiny by the EU executive for running up a deficit that exceeds the bloc’s limit.
Countries are legally bound to maintain deficits – the shortfall between revenue and spending – below 3pc of gross domestic product and keep gross debt – the amount the government borrows to finance the shortfall – below 60pc of GDP. Ireland’s deficit last year was 11.6pc of GDP, while debt rose to 64.5pc, both above EU thresholds.
In April last year Brussels gave the Government until 2013 to bring the deficit back into line but extended the deadline last December.
– Sarah Collins in Brussels