For Ireland, the model of European austerity measures, the pain is almost over, at least as far the government is concerned.
Finance Minister Michael Noonan penciled in another 2 billion euros ($2.7 billion) of tax increases and spending cuts next year as he narrows the budget deficit to below 3 percent of gross domestic product, a criterion for European Union members. Defying International Monetary Fund advice to stick with the plan, Noonan now says that target can be reached by doing less.
The Irish have endured 30 billion euros of austerity since 2008. With bond yields plunging, economic growth accelerating and two years until the next election, Noonan is facing political pressure to take his foot off the pedal. This month, he urged the EU to ease budget rules, while the government laid out plans to cut income taxes.
“An end to austerity is in sight,” said Fiona Hayes, an analyst at Cantor Fitzgerald LLP, a Dublin-based primary dealer in Irish debt. She expects budget measures will be about half of what was planned, or 1 billion euros.
On July 11, as the government sought to arrest a slide in its support, Prime Minister Enda Kenny promised to cut the 52 percent tax rate on “low- and middle- income earners” over a number of budgets, increase access to subsidized childcare and eliminate doctor’s fees for the elderly.
A day before, Ireland sold 500 million euros of 10-year bonds, even as banking stocks and the bonds of Europe’s most indebted nations extended declines after a parent of Portugal’s Banco Espirito Santo SA missed payments on some securities. The Irish bonds yielded 2.32 percent, down from 2.73 percent at a similar auction in May and a peak of 14.2 percent in July 2011.
Last month, Craig Beaumont, the IMF’s mission chief to Ireland, said the Washington-based fund favors sticking with the planned cuts to protect the country’s “hard-won” credibility, regardless of the nation’s growth prospects.
“If growth turns out to be very strong, the deficit will come in under ceiling, so there is a healthy buffer helping to get closer to the medium term goal of budget balance,” he told reporters on June 18. “If growth turns out to be very weak, it may be the case that the deficit ceiling is not quite met.”
A day later, Noonan, who last year described troika officials as “kind of honorary Irish people,” responded at a parliamentary hearing by comparing his job with Beaumont’s.
“There is a different set of skills needed if you are a politician running a government department to somebody working for the IMF,” he said. “It is not all cut and dried. I am a democrat and I have to bring the people with me.”
Ireland sought a bailout from the troika of the IMF, EU and European Central Bank in 2010 as its borrowing costs surged and budget deficit swelled in the wake of the euro region’s worst banking crisis. It exited the rescue program in December, underpinned by austerity equivalent about a fifth of the economy and the ECB’s pledge to keep the euro area together.
Irish 10-year bonds now yield 1.09 percentage points more than their German equivalents, that spread narrowing from 1.58 percentage points at the end of 2013.
With investors won over, Noonan now has to woo voters. Backing for Prime Minister Enda Kenny’s Fine Gael party has dropped to 22 percent, down from about 36 percent in the 2011 election, according to an opinion poll last month.
This month, the Labour Party, the junior member of the ruling coalition, chose Joan Burton to replace Eamon Gilmore as leader after groups opposed to spending cuts wiped out much of its support in local and European elections.
Accelerating economic growth is giving Noonan some breathing room. Gross domestic product rose 2.7 percent in the first quarter, the most since the end of 2012, the country’s statistics office said this month. The economy grew 4.1 percent from the year earlier.
With companies ranging from Airbnb Inc. to PayPal Inc. creating jobs in Ireland, employment is growing and the government’s finances are improving. In the first six months of the year, the deficit shrank to 4.9 billion euros from 6.6 billion euros a year earlier.
“Irish budget execution has been solid throughout the country’s troika program,” Lefteris Farmakis and Pooja Kumra, analysts at Nomura International in London wrote in a note. “2014 is no exception.”
Noonan took the fight to Europe last week, calling for some flexibility in fiscal rules. German Finance Minister Wolfgang Schaeuble said that “structural reform is not an excuse or an alternative for ongoing fiscal consolidation.”
“Unsurprisingly, the idea of budgetary flexibility is meeting resistance particularly from the core European countries,” said Juliet Tennent, an economist at Goodbody Stockbrokers in Dublin. “However, the growth versus austerity debate looks set to continue.”
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