Central Bank boss calls for more savage cuts in Budget
MORE savage Budget cutbacks are necessary if international investors are to be convinced that Ireland is on the path to recovery, the governor of the Central Bank warned yesterday.
Professor Patrick Honohan suggested the Government look again at its cost-cutting plans for the upcoming Budget.
He warned that the country was not on course to reduce the budget deficit to 3pc by 2014 with its current plans and urged "explicit reprogramming" of the public finances over the coming years.
The warning came as the cost of government borrowing shot up by more than half a per cent over the past week to 6.43pc. Investor appetite for Irish debt will be tested again this morning as the country sells another €1.5bn bond on the international markets.
Speaking at a banking conference in Dublin, Prof Honohan said the Government had met targets for budget savings in 2009 and 2010. But he warned that meeting a budget deficit target of 3pc by 2014 looked increasingly difficult.
He said the performance of the economy, the cost of government debt and the cost of bailing out the banks were making it harder to meet this target.
In his call to revisit the current budget programme, Prof Honohan issued a warning against continuing with the plan, saying there was a danger investors did not believe it would be achieved.
"Recent movements in the yield spread on government debt (the cost of borrowing) demonstrate the costs that can result unless international lenders remain convinced the Budget is going to be kept on a convergent path," he warned.
He said it was important to 're-set' the path to recovery to ensure lower borrowing rates in the future.
Last week, Finance Minister Brian Lenihan said December's Budget would slash at least €3bn from spending on public services.
The Government is under severe pressure to calm market jitters by giving international investors clarity on the final cost of the Anglo Irish Bank bailout and an update on budget cuts. Both sets of figures are expected to be revealed in the coming weeks.
Mr Honohan said the cost of the banking bailouts would continue to be a heavy burden on taxpayers for several years to come. But he insisted the measures were "manageable" in terms of the public finances.
He also expressed his relief at last week's decision to break up and wind down Anglo.
Speaking to the Irish Independent, John Fitzgerald, chief economist with the Economic and Social Research Institute, agreed that public finances were the biggest issue facing the country. "The public finances are the crucial issue, 13.5pc of people are unemployed and we are borrowing €20bn per annum," he said.
A spokesman for the Department of Finance said the Government agreed with Prof Honohan on the importance of tackling the public finances, but said: "This is what the Government has done and will continue to do."
Meanwhile, the EU has said it is "possible" the Government could be granted a year's grace on a 2014 deadline to rein in the public finances given heightened tensions on bond markets and uncertainty over the final cost of winding up Anglo.
cost of anglo 'less than estimates': Business, p37