Slow growth, but it won’t mean more Budget pain
Published 15/11/2012 | 05:00
The Government has said there is no need for a tougher Budget, despite slower growth than previously forecast.
But more than half of the €3.5bn austerity measures in next month’s Budget will be needed to pay off debt at the failed Anglo Irish Bank, unless there is a last-minute deal on the so-called promissory notes.
The slower rate of growth means fewer jobs will be created over the next three years than previously predicted, latest estimates from the Department of Finance say.
“Perhaps the most significant feature of (this) statement was the focus on benefits, suggesting that the Government has identified better-targeted social spending as the most opportune way to implement this year's expenditure cuts,” said Conall MacCoille, chief economist at Davy stockbrokers.
The Government believes it can meet the troika targets by using extra revenues generated this year and cutting back on reserves. “It can be done, but it will be tight,” a spokesman said.
This means the department has succeeded in its desire to maintain the targets – as recently explained by Secretary General John Moran – but without having to add extra austerity.
The Government is also depending on inflation being somewhat higher, which will help achieve the targets.
Higher prices mean that the department now expects the value of next year’s national output (GDP) to be €168bn, rather than the previous €164bn.
This may help achieve the bailout target of a deficit of 7.5pc of GDP next year, but the slower growth will hit jobs. The slowdown in major economies is the main reason the department expects output – mainly exports – to grow by 1.5pc next year, instead of the original 2.4pc.
Although it sees 18,000 extra jobs by 2015, this will not be enough to match the growth in the numbers seeking work.
The unemployment rate, now at almost 15pc, will fall only to 13.5pc, instead of the hoped-for reduction to 11pc in three years' time, with damaging social consequences.
"Unemployment of over two years' duration is now at 39pc and over three years' duration is 23pc. This level of persistence suggests that unemployment is becoming increasingly structural in nature," the document says.
Next year is the first in which the Government will have to pay interest on the €30bn borrowed to cover losses at Anglo (now IBRC).
Unless there is a last-minute deal with the European Central Bank, the €1.9bn payment will represent a "significant additional item".
Without this, next year's deficit would tumble to 6.4pc of GDP, instead of the tiny one percentage point improvement in the Budget plan.
Things could change again if tax revenues this month fall short of expectations. November is the month for self-assessed income tax payments.
The department expects €5.7bn – almost 16pc of total tax revenue for the year – to be collected this month.
The document gives some of the clearest hints yet on the contents of next month's Budget, when €1bn will be raised in new tax revenues and day-to-day spending cut by €1.7bn.
"It will be necessary to examine the full range of social transfers," the document says, including universal payments such as child benefit.
The Government remains committed to leaving income tax rates and bands unchanged – although most of the increase in revenues so far has come from other income tax changes.
It is expected to concentrate on reducing tax reliefs – including mortgage interest relief – and broadening the base for PRSI by applying it to areas like rental income and dividends.