'Debt trap' warning
Cowen told cuts must go on as State borrowing to cost more
THE cost of our debt could spiral out of control if we don't press on with swingeing cutbacks, Taoiseach Brian Cowen was warned last night.
The warning came as new figures raised fears the economy could be caught in a 'debt trap'.
Mr Cowen was given the stark warning by the largest international credit rating agency, Moody's, which lowered our status as a borrower. That will make it even more expensive for the Government to get loans to keep the economy afloat.
The latest blow came despite Exchequer returns for the first six months of the year showing the public finances broadly on target after April's emergency Budget.
The returns reveal total tax revenue amounted to €15.8bn in the year to June. That was 17pc down on the same period last year, but only 1.2pc below the target set in the Budget.
But more swingeing measures are essential over the next 18 months if we are to curb the escalating debt mountain, experts said.
Both Moody's and local analysts saw worrying signs of a 'debt trap' in the figures, where a shrinking economy widens the gap between income and spending despite higher taxes and cuts.
Last night, Finance Minister Brian Lenihan said the rate of decline in overall tax revenue had eased. "There are still substantial targets in the months ahead, so tax revenues will need to be carefully monitored as the year progresses," he said.
"Apart from corporation taxes, there has been no major improvement in tax revenues of late," Austin Hughes, chief economist at KBC Bank in Dublin, said. "This suggests the impact of various tax increases has broadly been offset by the adverse impact of a weaker economy and a pull-back in spending.
"Clearly an economy where taxes are declining faster than the economy, and public spending is increasing, is not on a sustainable path."
Moody's cut our credit worthiness by another notch to the third level, down from its top "AAA" grade.
The company's senior analyst Dietmar Hornung said Ireland's rating was likely to be cut again if the budgetary situation did not improve. They would be watching the 2010 budget carefully, he said. "It is envisaged that further fiscal consolidation will be considerable in size, although this has not been specified. That would be key for us -- that Ireland is fiscally able to adjust," he said.
The warning comes against a background of growing political tensions over the plan to cut another €4bn off the deficit next year -- most of it in spending. The Government has not decided whether to publish the spending cuts identified in the report of the cost-cutting review body known as "An Bord Snip Nua". There is already resistance to the idea of a property tax, even though the Exchequer returns suggest that higher income taxes are already producing lower returns, as falling incomes and higher unemployment reduce revenue.
"One area that we will be paying particular attention to in coming months is income tax, given the disappointing June return," according to Simon Barry, senior economist at Ulster Bank. The figures show that the levies imposed in the April Budget cost taxpayers €120m in June, compared with €50m a month from the levies in the October Budget. Moody's Hornung said that the adjustment under way here was already "quite considerable".
But Ireland's creditworthiness "has lost altitude to an extent that is no longer compatible with a 'AAA' rating".
"The strength of the economic recovery will depend on Ireland's capability to restore competitiveness -- particularly to reduce wages, which are currently among the highest in the eurozone," Mr Hornung said.