Ireland Must Focus on Economic Recovery After Deficit Cut, Economists Say
Ireland’s government must now focus on reviving economic growth after announcing a 15 billion-euro ($21 billion) plan to cut its deficit by 2014, economists said.
The planned spending cuts and tax increases are twice as much as the government previously said it would put in place to narrow the budget gap to the European Union limit of 3 percent of gross domestic product in four years.
“It will be a tall order for Ireland to meet the 2014 deadline given the fragility of both the domestic and global economy,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said in a note to investors. “Ireland will have to generate economic growth if the target is to be met.”
Investor concern that Ireland won’t be able to lower the deficit due to the mounting burden of bank bailouts has pushed up the nation’s borrowing costs. Finance Minister Brian Lenihan will next month announce details of the budget plan, which he said will include a “significant frontloading” for 2011.
“With the scale of consolidation now known, the department’s strategy for returning the economy to growth” could “now be described as more important than the consolidation measures,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin.
Ireland’s budget shortfall will reach about 32 percent of GDP this year, due to a one-time spike from bank-bailout costs, the government said last month. Excluding that, the deficit will be about 12 percent.
The spread between Irish and German 10-year debt widened to 454 basis points on Sept. 29. It was at 391 basis points today, still the second highest in the euro area after Greece. The yield on the Irish bonds was at 6.36 percent.
Ireland’s first step must be a “credible” program that will convince investors, said McQuaid, adding this may allow the government to extend the 2014 deadline at a later date if needed. Aidan Corcoran at Dublin-based Davy said that given the need to “convince markets,” a “disproportionate chunk” of the 15 billion euros may be needed in 2011.
“A menu of options must be laid out,” said O’Leary. “While the European Commission is putting pressure on Ireland to achieve the 3 percent target by 2014, it is the markets that will be the arbiter of whether the series of measures is enough.”
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