|Minister for Finance Brian Lenihan and Taoiseach Brian Cowen at the launch of a pensions report in March 2010. |
Ireland's budget deficit could rise to 24% of GDP (gross domestic product) in 2010 or about €40bn, following a ruling by Eurostat, the statistics office of the European Commission, on the treatment of public spending on the State nationalised Anglo Irish Bank.
Last October, Finfacts reported that the Minister for Finance, Brian Lenihan, had welcomed the preliminary view from Eurostat, that the then expected €54bn in public debt which the Government planned to raise to pay for the toxic property loans to be transferred to the Irish "bad bank:" NAMA, would not have be included in the national debt total. It would have added 33% to the 2010 debt/GDP ratio bringing it to 109%.
On State recapitalisation of banks, Eurostat takes the view that capital provided to AIB and Bank of Ireland are investments while it takes a prudent view that spending on Anglo Irish Bank is not and the same will likely apply to Irish Nationwide. This has serious implications as it means that the target to lower the annual budget deficit to 3% by the Euro Stability and growth Pact rules, will not be met.
In data published on Thursday, Eurostat stated the Irish deficit in 2009 as €23.35bn, which includes €4bn injected in Anglo Irish Bank.
The move had the impact of raising the deficit to 14.3%, the highest in Europe, from the Government figure of 11.8%.
On March 30th, the Government agreed to provide €8.3bn to Anglo Irish Bank bank and it said a further injection €10bn to allow it absorb losses on loans going to the NAMA, would be provided this year. A further €2.7bn is due to be provided this year to Irish Nationwide.
So a budget deficit of €40bn on GDP of €164bn, would result in a deficit ratio of 24%.
While the ratio would fall in 2011, the additional debt would make the task of reducing the total debt ratio to GDP, to 60% even a steeper challenge.
Apart from the bank funding issues, given that GNP (gross national product) was 19% below GDP (including profits of the big multinational sector) in 2009, the Irish budget ratio is already understated.
In most economies there is not much variation between GNP and GDP.
Deutsche Bank has forecast that the ratio for Ireland could be 118% by 2020.
Minister for Finance Brian Lenihan said there was no change in the Government’s deficit plan. “This is a once-off impact, and will not affect the Government’s stated budgetary aim of reducing the deficit to below 3% of GDP by 2014,” he said.
“There is no additional borrowing associated with this technical reclassification.”
Fine Gael deputy leader and finance spokesman Richard Bruton said the impact of the decision on next year’s budget would be very serious.
“It means that if the Government is to meet its 3% budget deficit figure by 2014, as agreed with the European Commission, it will have to find significant additional savings,”he said.
SEE: Finfacts article for more information; Eurozone and EU27 budget deficit at 6.3%/ 6.8% of GDP in 2009; Government debt at 78.7% and 73.6%
Dept of Finance information on the Eurostat ruling