Pressure mounts for tougher Budget after economy shrinks
Published 24/09/2010 | 05:00
PRESSURE mounted yesterday for a tougher Budget this December, as new figures unexpectedly showed that the economy shrank in the spring.
The decline, announced an hour after the National Treasury Management Agency failed to borrow as much short-term cash as it had hoped, and the yield -- or interest charged -- on the 10-year Irish bonds spiked to a new record, promoted fears that Ireland may be sliding back into a recession.
A recession is technically defined as two quarters of contraction.
"It is clear that the economy is sluggish," Finance Minister Brian Lenihan admitted yesterday while ruling out the possibility of a so-called double-dip recession.
The Department of Finance said it would revise the official growth forecasts next month when it would also publish a pre-Budget outlook.
"This is probably going to mean a tougher Budget," said Stephen Taylor, equity analyst with Dolmen Stockbrokers. "To be honest, they should probably look to bring the Budget forward a little bit to settle bond markets."
"A Budget that shows the Government is capable of sustaining the fiscal adjustment and sticking to its pre-announced targets is required. In practical terms, this means adjustments of between €3bn and €3.3bn in Budget 2011, and greater clarity on subsequent years," said Austin Hughes, chief economist at KBC Bank.
"However, the data also hint that markedly stepping up the pace of adjustment in Budget 2011 could carry significant risks for a still fragile economy."
The problems for the public finances were intensified by the scale of deflation in the economy. Although the purchasing power of national income fell by 4pc on last year, its actual cash value -- on which taxes are paid -- dropped 6pc.
"There is very little chance of Ireland posting positive GDP growth for the year as a whole, and forecasters, including those at the Department of Finance will have to revise down their projections for both this year and next," Bloxham Stockbroker's Alan McQuaid said.
"This in turn will only add to the pressure on the Government to deliver a further €3bn to €4bn in budgetary adjustments in the December Budget and at the same time try and boost activity and growth in the economy.
"One thing these figures should do is provide a clear signal that raising taxes further on hard-pressed workers would only be counter-productive at this juncture," he said.
IBEC, the employers lobby group, called for clarity about the size of the cuts in December's Budget.
"Government has an opportunity to give consumers and businesses some certainty about the outlook for 2011," said IBEC director general Danny McCoy.
Gross domestic product of goods and services (GDP) fell 1.2pc in the second quarter when seasonal factors are included while gross national product, which is often seen as a better measure of the Irish economy, fell by 0.3pc -- the ninth successive quarterly decline.
Although economists had hoped for growth in the quarter, the figures did show increased stability in economic activity.
Consumer spending fell by 0.2pc during the three-month period of April to June, making it the second best quarter since mid-2008.
Building output actually increased, helping to produce the first quarterly increase in investment since the end of 2007.
Strong imports of materials for the chemicals industry pulled down growth in the quarter, but may translate into higher growth from exports in coming months.
The economy officially came out of recession in the first quarter and most economists had expected yesterday's figures to show further growth in the second quarter.
"Consumers remain reluctant to spend given the current high level of unemployment and uncertainty over job prospects in the short-term, and also due to pure despair at the endless amounts of money being thrown at Anglo Irish Bank," Bloxham's Alan McQuaid said.