Everyone a loser as Lenihan cuts €15bn
Living standards to tumble as Cabinet plots four-year budget
Published 27/10/2010 | 05:00
WE face a massive cut in our living standards, the Government warned last night, as it plotted a €15bn course of savage spending cuts and taxes.
The first cuts in a four-year package of "hairshirt" budgets will be the deepest, Finance Minister Brian Lenihan admitted, but he refused to put a figure on this year's total.
This will inevitably mean cuts to welfare benefits across the board, frontline health services and the education system.
The stark extent of what has to be done to rescue the economy was outlined after two days of intense talks and discussions.
The new €15bn target is twice as bad as the previous prediction. It more than matches the amount of spending cuts and tax hikes already inflicted since the economic crisis began over the past two years.
And there were suggestions from economists that the measures might not even be enough to bridge the gaping hole in the public finances.
A gloomy forecast from the country's largest stockbrokers shows how the Government may be chasing a moving target with its €15bn budget correction.
The 2011 estimates from Davy Research are significantly gloomier than those from the ESRI on which the Government is basing its budgetary plans.
The Economic and Social Research Institute expected national income (GNP) growth of 2pc and 2.25pc in output (GDP).
Davy says GNP will rise by only 1.2pc and GDP by 1.9pc. Even these differences would be enough to add some €2bn to the deficit/GDP ratio.
Despite that, the Government is still not expected to dip into the EU's emergency fund, despite a more attractive interest rate.
Ministers admitted the country was only halfway through fixing the problem after €14.5bn was already taken out in spending and taxes since 2008.
Mr Lenihan said there would be "significant frontloading", meaning well over a quarter of the total package will be rolled out next year. This means cuts and taxes worth at least €4.5bn are now on the cards, and this figure will most likely surpass the €5bn, even heading towards €6bn.
The Government's decision to go with a high figure of €15bn is based on an average economic growth rate over the next four years of 2.75pc per annum.
The €15bn target was first revealed in the Irish Independent last week.
Announcing the keenly-anticipated figure after two days of cabinet talks, the Government said it was "neither credible nor realistic" to delay these measures. "The Government realises that the expenditure adjustments and revenue-raising measures that must now be introduced will have an impact on the living standards of citizens," a statement from the coalition said.
Today Mr Lenihan and Taoiseach Brian Cowen will outline their economic outlook.
Fine Gael and the Labour Party last night refused to say if they would match the €15bn to be outlined by the Government with their own proposals. The opposition parties are disputing the Government's economic growth estimates.
However, Mr Lenihan's figures are expected to receive the powerful backing of European Commissioner for Economic and Monetary Affairs Olli Rehn, who will visit Dublin in the coming weeks to brief the opposition, trade unions and employers.
The Government's plan to reduce the deficit to 3pc of GDP by 2014, now officially called the 'Four Year Plan for Budgets and Economic Growth', will be published in the middle of November.
Mr Lenihan said the Government had to opt for the high-end figure of €15bn to ensure the plan was viewed as credible by the international markets.
Ruling out asking for more time to reduce the deficit, the minister did concede the Government could ease up with the cuts in the last two years if there was an improvement in economic fortunes.
A leading financial expert said the Government had to make the largest adjustment next year to reduce the cost of borrowing.
"The lower the deficit in 2011, the less taxpayers will have to pay in interest next year and in the coming years.
"Taxpayers have the same interests as holders of Irish government debt -- they want to see responsible management of the State's finances. That entails meeting the already generous targets agreed with the European authorities," said Ciaran O'Hagan, bond strategist with Societe Generale in Paris.
Meanwhile, Ireland and other indebted countries would be able to borrow from the European stabilisation fund at 5pc, the head of the fund indicated yesterday.
However, Klaus Regling said his "expectation" was that no further European countries, apart from Greece, would need to access the fund.
Mr Regling is known in Ireland for carrying out a report on the roots of the banking crisis.
He said the interest rate on any European Financial Stabilisation Facility (EFSF) loans to countries would be "comparable" to the 5pc rate that Greece pays for its emergency funding from fellow eurozone economies.
"There is a general understanding that borrowing costs would be comparable to the Greek case," he said.
"This is around the 5pc."
Ireland's borrowing costs currently stand at 6.3pc in the market, but while switching to a cheaper form of funding would be attractive, it would involve a huge loss of sovereignty.