Lenihan now admits economy will shrink by up to 4pc next year
FINANCE Minister Brian Lenihan last night admitted that the economy will contract by between 3-4pc next year.
The scale of the collapse is more than three times the 1pc contraction that the minister predicted for 2009 in his budget speech.
Mr Lenihan said a dramatic shortfall in government revenue this year would inevitable have a knock-on effect into the next.
This would push the 2009 general government deficit up by €1.5bn to 7.25pc of GDP.
"All the indications are that economic activity in 2009 will contract by significantly more than the forecast in the recent Budget with an overall contraction of perhaps somewhere in the region of 3pc to 4pc," he told the Dail.
Mr Lenihan also ruled out VAT cuts in a bid to boost the economy.
He claimed that bringing Irish VAT in line with British rates would cost the Exchequer almost €3bn a year.
Mr Lenihan told the Dail that capital spending under the curtailed National Development Plan would constitute the State's stimulus package for next year, which rules out any reduction in indirect taxation.
He said he had asked the Revenue Commissioners to assess the level of loss to the economy caused by cross-border shopping. But he was unable to say when it might be finished.
Mr Lenihan emphasised once again that the dramatic weakening of sterling was the main magnet attracting southern shoppers to the North, rather than the reduction in VAT in the recent British budget.
He said each cut of one point in the rate of VAT here would cost €450m in a full year. A two and a half per cent cut, as in Britain, would cost €1.25bn -- or more than would be raised by the new income levy.
To reduce Irish VAT rates to those of Britain would mean a cut of 6.5 points, which would mean a loss to the Exchequer of almost €3bn in a full year.
The stark admission of a widening gap in the public finances sparked sharp criticism from the Opposition.
Labour spokeswoman Joan Burton last night said the admission showed his Budget day forecasts were "hopelessly optimistic".
Fine Gael Finance spokesman Richard Bruton said it was now shown to be a serious mistake as the figures did not hold water.
However, the minister hit back insisting the predictions had been in line with the forecasts of the ESRI and the Central Bank.
- Patricia McDonagh and Senan Molony
