Europe Ireland’s budget
Light at the end of the tunnel
Ireland’s sixth austerity budget
Since mid-2008, successive governments have taken 25 billion euro ($33 billion) out of the Irish economy in tax rises and spending cuts, the equivalent of 16% of economic output in 2011. On December 5th Michael Noonan, the finance minister, removed another 3.5 billion euro when he presented the country’s sixth austerity budget.
This is the latest instalment of an austerity plan that the government hopes will achieve two goals. One is to enable Ireland next year to leave the 67.5 billion euro bail-out programme with the European Union, IMF and European Central Bank (ECB) agreed in 2010 and regain access to market funding. The other is to reduce the budget deficit to below 3% of GDP by 2015. At 8.2% Ireland’s budget deficit is still one of the highest in the EU.
In his budget measures, Mr Noonan broadened Ireland’s narrow revenue base. He focused on higher-income earners. Wealthier pensioners will feel the pain: the cap on tax relief for pension contributions will be lower and better-off pensioners (those over 70 with incomes over 60,000 euro) are hit by higher social charges. A modest residential-property tax has been introduced against the background of a collapse in house prices. Many new homeowners are in negative equity, with a growing number in arrears on their mortgage payments.
The government is relying on economic growth to meet its ambitious budget targets for 2013. It is forecasting 1.5% GDP growth for next year, which seems optimistic given Ireland’s dependence on an export-led recovery to achieve it. That may prove difficult with the euro zone in recession and a weakening British economy. Another concern is the sustainability of Ireland’s public debt, which is expected to hit 118% of GDP this year. Almost a third of it is accounted for by state support for distressed banks. Discussions with the ECB on restructuring the promissory notes that the government issued to cover 30 billion euro in losses, mostly at Anglo Irish Bank, have continued for more than a year without success. The government’s hopes that the new European Stability Mechanism could be used to take over state-owned Irish banks in a debt-equity swap, have also been disappointed.
The government’s major achievement in 2012 has been the sharp reduction in bond yields onIreland’s sovereign debt, which reflects its success in meeting all the targets set in the EU/IMF programme. In January Ireland takes over the six-monthly presidency of the EU. Haggling in Brusselsis likely to absorb much of the attention of Irish ministers, leaving less time for pressing national concerns—such as debt relief.