July 2 (Bloomberg) -- Ireland’s budget deficit narrowed 40 percent in the first half of the year as the government reduced spending and didn’t pay into the country’s pension reserve fund.
The deficit of 8.9 billion euros ($11.2 billion) compared with a shortfall of 14.7 billion euros in the year-earlier period, the Dublin-based Finance Ministry in Dublin said in a statement on its website today. Spending fell 1.9 percent to 19.7 billion euros.
Ireland’s economy returned to growth in the first quarter and the government is betting that spending cuts that began in 2008 may protect the country from the debt-crisis contagion rippling through the euro region. Finance Minister Brian Lenihan said Ireland’s fiscal position is “stabilizing” and that the target for about 20 billion euros in debt sales this year remains “valid.”
The deficit “is generally in-line with my department’s expectations,” Lenihan said in a statement. “The public finances are stabilizing. Economic recovery will assist this process, though serious challenges remain.”
Irish 10-year bonds extended gains after the figures were published, pushing the yield down 17 basis to 5.3 percent as of 4:57 p.m. in Dublin. The premium investors charge to hold that debt over the equivalent German benchmark narrowed to 272.4 basis points from 290.5 basis points yesterday.
The narrowing of the deficit is largely due to payments to the National Pension Reserve Fund and Anglo Irish Bank Corp. in 2009 that weren’t repeated this year, the ministry said. Tax receipts fell 8.7 percent to 14.4 billion euros in the first half.
“The euro area debt crisis has the potential to put a spanner in the works as regards the Irish economic recovery, though we’re still confident we can ride out the storm,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “If the government can continue to deliver on fiscal austerity measures,” there is “every chance we will get through this crisis with our economic integrity and reputation intact.”
Ireland’s economy shrank about 10 percent in the last two years as its property market slumped, unemployment soared and the financial system almost collapsed. The government has raised taxes and cut spending in a bid to reduce a budget deficit that widened to 14.3 percent of gross domestic product in 2009, the largest in the European Union.
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