Rising debt costs spark fears of an early budget
Bord Snip author warns Lenihan of fallout from eurozone crisis
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Finance Minister Brian Lenihan will be forced into holding an early budget because of the soaring cost of borrowing to Ireland in the wake of the Greek financial crisis, it was warned this weekend.
Several economists, including Colm McCarthy, UCD economist and author of last year's An Bord Snip Nua report on government spending, have said this weekend that adverse borrowing costs could require that the budget come earlier than December.
Despite Mr Lenihan's repeated statements that there won't be a budget before December, as a result of the Greek financial difficulty, the cost of borrowing for Ireland has shot up in recent days, meaning much of the fiscal progress made last year has been reversed. Speaking to the Sunday Independent this weekend, Mr Lenihan said: "After three budgets, and five major banking announcements, I envisage no more budgeting announcements this year. At long last, I will have a few months to reflect."
However, economists have said that Mr Lenihan is being both overly optimistic and premature with his comments, given the impact of the ongoing Greek crisis. Mr Lenihan needs to reduce government spending by €3bn this year to remain on course to bring Ireland's deficit back under the agreed EU limits.
Because of our significant budget deficit, it will cost €1bn this year alone to service our debt and with tax revenues continuing to fall, as revealed in last Wednesday's exchequer returns, Mr Lenihan may have no choice but to call an early budget.
With Mr Lenihan's cave-in on his budget day plans for reforms to the 'Rolls Royce' pension arrangement for public and civil servants and his earlier comments that income taxes cannot be increased further, the Finance Minister's options to make fiscal adjustments are narrowing.
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When a country has large external liabilities, either as public or private debt, it is highly vulnerable in an international liquidity squeeze.
Ireland, as a result of the credit-fuelled property bubble, has enormous external private sector liabilities as well as public debt that is largely held abroad. Mr McCarthy said that the increased cost of borrowing because of the Greek crisis and Ireland's need to reduce its debt levels mean Mr Lenihan may be forced to deliver an early budget. Mr McCarthy said: "While Ireland has no immediate need to borrow again it must return to the markets in due course, and there is now a risk that it will face higher borrowing costs. This is unambiguously bad news, and a piece of bad luck since the decline in Irish spreads, a recognition of the early and sustained efforts to rein in the budget deficit, has now been reversed."
He continued: "Next December's budget is planned to reduce the deficit in line with the 2014 target, which is to borrow no more than three per cent of GDP.
"A sustained adverse level of borrowing costs could require that the budget come earlier than December, and there is no downside to indicating a willingness to contemplate such acceleration now."
Mr McCarthy also said the Government should lay out their gameplan of proposed cuts now to provide confidence both home and abroad.
"The Government could also give some more advance detail of the components of the medium-term fiscal consolidation programme," he added. Fine Gael's Finance spokesman Richard Bruton has said the latest exchequer figures show some sign that things are improving, but he was deeply critical of the lack of a government plan to create more jobs.
- DANIEL McCONNELL Chief Reporter
Originally published in
