independent

Thursday 17 April 2014

Video: A step towards bond markets but jobless still big worry - Alan McQuaid

THERE were no great surprises in the latest Budget package (€3.5bn) as most of the key features like a property tax, and a €10 reduction in child allowance were leaked to the media in advance.

However, the measures are unlikely to do anything for the domestic economy which continues to suffer, with little sign that things will improve in the short-term, especially with a further €5.1bn in austerity (€3.3bn in spending cuts and €1.8bn in tax measures) due in 2014-2015.

Although a clear aim of the Budget is to sustain growth and boost employment, it is going to be a tall order. While the labour market appears to have stabilised and there were some positive measures announced to boost jobs, it is hard to see a steady and sharp fall in the numbers out of work any time soon.

Following the €3.5bn of austerity in Budget 2013, the Department of Finance is projecting real GDP growth of 1.5pc next year, but the risks are to the downside given that the 0.18pc tax imposed on the value of a house for ordinary homeowners is likely to dampen consumer spending next year. Furthermore, unless things improve on the global economic front then export growth is likely to be weaker than currently envisaged.

Still, the fact that Ireland is growing at all remains a positive. None of the other "peripheral" euro zone countries are likely to see a rise in national output next year. In fact, the majority of countries within Euroland are likely to struggle in 2013, a clear indication that the excessive level of fiscal austerity is simply not working.

Ireland's growth dynamics and its potential going forward should be reflected in the country's bond market fundamentals in the coming months, but it could be so much better if something was sorted out at EU level on our bank debt.

Ireland's ability to stimulate activity in the economy is being seriously hampered by the amount of money it has to pay out in terms of servicing the National Debt. Next year it is envisaged the bill will come to €8.1bn, as against €6.5bn in 2012. A total of €3.1bn has been earmarked for the controversial promissory note payment next year, again highlighting the need for urgency in trying to get a better deal from our creditors on the country's bank debt and easing the burden on hard-pressed Irish citizens.

The National Treasury Management Agency said recently that it hopes to begin regular monthly auctions in 2013 as it prepares to exit its EU/ IMF bailout. Dublin has made a limited return to bond markets in recent months as it prepares for an end to official funding in December next year, but has not issued a new benchmark 10-year bond or begun regular debt auctions. Today's Budget should be another positive step towards that goal.



Alan McQuaid is chief economist with Merrion Stockbrokers

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