Deficit target won't be hit but new cuts should be avoided, says bank
THE Government is unlikely to meet its deficit target this year but further budget cuts should be avoided to prevent a further deterioration in business and consumer sentiment, Ulster Bank says in a report.
The bank reckons that Ireland's economic growth this year will slump to just 0.2pc -- way off the 1.3pc forecast that underpinned the Government's December budget -- as export growth slows.
"This means that the 2012 budget deficit is likely to exceed the programme target of 8.6pc in our view," say Ulster Bank economists Simon Barry and John Fahey. They say that raises the question of whether additional fiscal measures should be introduced this year in order to prevent that target being missed.
But they warn that such a move would add to the headwinds already facing domestic demand, which is "very weak and fragile".
"On top of the direct impact of further policy tightening, an unscheduled supplementary budget would also create additional uncertainty for households and businesses as they reconsider investment, spending and hiring choices in the face of a different fiscal and economic outlook," the economists point out.
They caution: "At a time when the recovery is also facing a materially weaker external demand outlook, this could trigger a much more negative dynamic for the overall economy".
They say that could in turn intensify a downward spiral if a further negative impact on the real economy filtered into the public finances and the banking sector.
Following last December's tough Budget, a further €8.6bn of cuts are planned up to 2015. The International Monetary Fund has suggested the Government consider abandoning or revising some perks for the elderly, such as travel passes, medical cards and cheap electricity.
The Coalition believes its planned cuts will reduce the deficit to 2.9pc by 2015. But struggling eurozone and UK economies are weighing on Ireland's chances of being able to deliver targets.
Still, there are some bright spots. The head of the IMF, Christine Lagarde, said on Thursday that the agency may upgrade its growth forecast for the US amid signs the economy there is rallying.
While Ulster Bank expects Ireland to record weaker export performance this year compared with 2011, its economists still think that there will be an improvement in 2013, helped by more solid international demand. They expect export and economic growth to be 1.5pc next year.
The unemployment rate will average about 14.6pc this year compared with 14.4pc in 2011 as the overall rate of economic growth remains insufficient to generate sustained net job creation, the economists predict.