Irish Near Bailout ‘End-Game’ With Less Austerity in Budget

Ireland will today unveil its final budget before becoming the first country in the euro region to exit a bailout program, with the government planning to scale back austerity to foster economic growth.

Finance Minister Michael Noonan and Public Expenditure Brendan Howlin will detail 2.5 billion euros ($3.4 billion) of tax increases and spending cuts for 2014 in speeches that start at 2:30 p.m. in the Dublin parliament.

The government is reducing the 3.1 billion euros of adjustments it had originally sketched out for next year, trying to buttress signs of a recovery after the worst recession in Ireland’s modern history. Noonan will next week go to Strasbourg, Frankfurt and Washington to finalize details of the country’s departure from the rescue program brokered three years ago with European partners and the International Monetary Fund.

“Ireland is close to the end-game,” said Alan McQuaid, an economist at Merrion Capital in Dublin. “The key goal now is to ensure is that we don’t let the baton slip so close to the finishing line.”

Ireland has already partly re-entered sovereign debt markets after its borrowing costs dropped in the wake of European Central Bank President Mario Draghi’s pledge in July 2012 to do whatever it takes to defend the euro.

Falling Yields

The premium Ireland pays to borrow for a decade compared with Germany is 1.81 percentage points, down from a high of 11.4 points in July 2011. Fellow bailed-out nations Greece and Portugal pay premiums of 6.87 points and 4.83 points. The yield on Ireland’s 10-year bond has dropped to 3.67 percent, falling 21 basis points this month to below those of Spain and Italy.

While Draghi’s promise calmed markets, investors have also been reassured by the Irish government’s commitment to narrow the budget deficit. The shortfall will drop next year to 4.8 percent of gross domestic product, Noonan has said. That’s down from 13.4 percent in 2011.

Yet the economy is hardly buoyant and money disappears from households. Last week, the Finance Ministry cut its economic growth forecasts, reducing them to 0.2 percent and 1.8 percent this year and next from 1.3 percent and 2.4 percent.

A family earning about 40,000 euros has 3,500 euros less to spend a year since 2008, according to accountancy firm Grant Thornton. Families with an income of about 150,000 euros are down about 15,000 euros, it said.

“With disposable income sucked out of the economy to shore up government finances, it is no surprise that consumer spending remains weak and the strength of any economic recovery uncertain,” said Peter Vale, a tax partner at the firm.

Light in Tunnel

Against that backdrop, the government is implementing 600 million euros of austerity measures less than it originally pledged. Noonan said the deficit will still come in below the 5.1 percent target the government agreed in the bailout.

This change of policy “is a risky move,” said Philip O’Sullivan, an economist at Investec Plc in Dublin. “Time will tell if this gamble pays off.”

A raft of new charges will be introduced, according to reports in newspapers such as the Sunday Times, including a new levy on banks. The government will increase a tax on interest earned on deposits, scrap a monthly telephone allowance for pensioners and reduce welfare payments for new jobseekers under 25, the Irish Times reported today.

The government at the same time won’t increase tax or cut core welfare rates, and plans to introduce free medical care for under-fives.

“After five years of austerity, there is light at the end of the tunnel,” said Dermot O’Leary and Juliet Tennent, economists at Goodbody Stockbrokers in Dublin.