Europe calls for radical cuts to reduce our national debt
Friday October 02 2009
THE Government should cut the public deficit by raising retirement ages and lowering healthcare costs, according to a European Commission analysis of the consequences of the economic crisis.
Drawn up for discussion by EU finance ministers, the paper warns that Ireland, along with Britain and Latvia, will end up with public debts more than one-and-a-half times the size of their gross domestic product by 2020.
The commission says that Ireland's public debt will rise to 150-175pc of GDP in 2020, even if the country manages to reduce deficit by one percentage point a year from 2011. The debt ratio in the UK and Latvia is forecast to rise to 125-150pc of GDP under the same conditions.
Only a few countries, including Germany and Italy, would manage to get their debt ratios close to 100pc of GDP by 2020 with an annual one percentage point cut in deficits, according to the commission.
It says the European Union countries must start major budget deficit cuts in 2011 in the wake of the billions spent to help deal with the economic crisis.
But while raising the retirement age is one of the suggestions, a spokeswoman for the Department of Finance in Dublin played down the chances of any immediate or dramatic action.
And while she said the 2004 budget raised retirement age for public servants to 65 instead of after 40 years' service, further changes "would take a lot of discussion".
Stimulus
Any changes would have to be discussed with the unions, she said, adding that an individual's terms and conditions would also have to be taken into consideration.
The commission paper is for a meeting of EU finance ministers which was due to start yesterday and continues today. The meeting is to discuss how to withdraw public funds used to stimulate the economy and deal with the crisis.
EU leaders agreed yesterday that fiscal stimulus, seen at around 5pc of the 27-country bloc's gross domestic product this year and next, must continue in 2010 until recovery is assured.
Countries with high debt and large external imbalances or competitiveness problems should start reducing their deficits early, even if their recovery would be perceived as weak and delayed, the document suggests.
Those with more fiscal room to manoeuvre could phase out the stimulus gradually. The commission said most countries would need to cut their budget deficits by much more than 0.5pc of GDP a year and some by more than 1pc -- for several years -- to break the trend of fast-rising debt.
If growth next year is stronger than expected, any windfall revenues should be fully used to reduce borrowing.
Meanwhile, Gustav Smidth, senior analyst from Danske Bank's Fixed Income Research team in Denmark, raised the prospect of lower debt servicing costs for Ireland.
He said a decline in risk aversion in the bond markets, coupled with the turnaround in growth, will be positive for the countries that have seen the biggest increases in government bond yields.
- Pat Boyle
Irish Independent
