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News : Irish Economy Last Updated: Nov 7, 2010 - 7:43:07 AM

Budget 2011: Ireland's fiscal adjustment in 2011 is to be €6bn
By Finfacts Team
Nov 4, 2010 - 4:47:19 PM

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Source: Central Bank of Ireland

Budget 2011: The Government this afternoon announced that it plans tax raising and spending cut measures amounting to €6bn in Ireland's December Budget as part of the first year of a four-year plan for €15bn in fiscal adjustments to reduce the annual deficit to 3% of GDP (gross domestic product) by 2014.

The General Government deficit will be 9¼ to 9½% of GDP next year. Taking account of the €15bn consolidation package, the Department of Finance now expects annual average real GDP growth to be 2¾% over the 2011 to 2014 period.

Emigration of another 100,000 people is expected in 2011-2014 and the forecast for growth over the next four years, which sees a cumulative increase in output (GDP) of 11%.

The peak year will be 2012, where the Department of Finance sees growth of 3.2%, falling back to 2.75% in 2014. In 2011, GDP (gross domestic product) is expected to be 1.75% and GNP (gross national product) which excludes teh profits of the multinational sector, will be lower.

The Minister for Finance Brian Lenihan said: “Over the past two and a half years, the Government has consistently demonstrated its determination to restore stability to the public finances.

Since mid-2008, the Government has implemented measures worth close to €15 billion in order to stabilise the position. The Exchequer Returns in recent months and other data shows we are succeeding. This stabilisation must now be followed by a reduction of the deficit in line with the commitments given. I welcome the agreement of the main opposition parties to the 3% deficit target by 2014, which sends out a strong signal that Ireland is committed to putting its public finances in order.

The Government has decided that a consolidation package of €15 billion will be required over the course of the next four years if we are to deliver on our deficit reduction target."

Information Note on Economic and Budgetary Outlook for 2011 to 2014  (pdf)

The Department of Finance said it has reached an agreement with the European Commission to take a "interest holiday'' on the money it is providing to Anglo Irish Bank, Irish Nationwide and EBS, which will improve the headline Irish figures.

"The effect is to improve the headline deficit," a Department of Finance spokesman said, adding that it does not change the actual borrowing being done for the banks by the National Treasury Management Agency (NTMA).

The Department said it is currently estimated that the interest accruing into 2010 in respect of these promissory notes issued in respect of the bank capital is around €560m. However, the terms of the promissory notes will provide that no interest will be chargeable in 2011 and 2012.

The impact of the interest on the promissory notes on the General Government Balance/Debt is approximately €1¾bn in both 2013 and 2014, and reducing in subsequent years. This equates to about 1% of GDP. However, the Department said it should be noted that this does not affect in any year the actual borrowing being carried out by the NTMA in order to pay the capital amounts due to the relevant financial institutions.

Brian Devine, economist at NCB Stockbrokers said  earlier Thursday that: Clearly, a sufficient number of players in the market believe that Ireland’s solvency is questionable. The cumulative probability of Ireland defaulting in the next 10 years according to CDS prices, using the market standard recovery rate of 40%, is now 60%.

Using a more realistic recovery rate of 70% implies that the cumulative probability of Ireland defaulting over the next 10 years is 84% according to the 10 year CDS. We think that this probability is too high given the underlying economic reality and Ireland’s clear commitment to fiscal consolidation. That is, we believe the probability weighted economic reality is not as unfavourable as that implied by the market.

Market reality though is key in terms of liquidity and the future knock on effects to solvency. Ireland needs to re‐enter the funding markets next year, realistically before the end of Q1 2011, unless domestic measures such as those mentioned below are mobilised. The current yield levels may not reflect the ultimate economic reality but they are ultimately what the Irish sovereign has to pay for funds. Yields at these levels for a sustained period of time would change the economic reality as a result of higher debt payments and the spiralling effects of debt dynamics.

On the European Financial Stability Facility (EFSF) bailout mechanism that was agreed by the EU last May, Brian Devine says: If there is not a dramatic change in sentiment we actually believe that it would be a positive for both the Irish economy and the bond market were Ireland to ask for the EFSF. It would take away the uncertainty surrounding the fiscal situation and the Irish economy more generally. Plans would be laid down in black and white and worries about interest costs would subside as they would be largely known. People and corporations like to make decisions in a stable world. Crucially it would enable the country to focus on correcting the deficit, regaining competitiveness and promoting its virtues – highly educated, English speaking, productive work force with world‐class companies and a pro‐business environment.

At the end of the three year period we believe that Ireland would be in a position to re‐enter the funding markets as it would have demonstrated that it was able to enact the required fiscal measures and leave the economy with a decent primary surplus at the end of the process. In such a scenario spreads would have narrowed sufficiently to allow Ireland to re‐enter markets at levels which would not be prohibitive. When this is combined with the decent primary surplus, it would demonstrate clearly that Ireland is solvent and thus would have no need to restructure debt.

Finfacts article, Oct 2010: Irish Economy: Why should the possible intervention of the IMF be viewed as 'scary'?

Finfacts Budget 2011 Page

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