Budget 2011: Double the pain (Irish Independent)

By Aine Kerr, Fionnan Sheahan and Maeve Dineen
Tuesday October 19 2010

THE hole in the Government’s finances is heading for €15bn — double the previous worst estimate — and that means families face four years of savage spending cuts and tax hikes.

They will face four draconian Budgets because the economy is failing to recover in line with expectations.

The revelation emerged as opposition finance spokespersons were briefed yesterday on the challenges facing the Exchequer over the next four years.

Savage cutbacks of at least €10bn are definitely on the cards up to 2014.

But Finance Minister Brian Lenihan’s officials disclosed the worst-case scenario was an adjustment of €15bn as a result of lower predictions on the rate of growth in the economy.

The Government is now under intense pressure to come clean with the public on the full scale of the Exchequer crisis. The deficit reduction will not be spread evenly over the four years — and that means the worst hit will come in December.

Rather than a €3bn package of cuts and taxes, the adjustment will certainly be as high as €4.5bn and could break the €6bn mark.

Based on the worst-case scenario of a €15bn hole in the finances, if the Government wants to get the deficit below 10pc next year, it would have to make an adjustment of anything up to €7bn.

The Department of Finance’s projections indicate economic growth may be as little as half the previous estimate, with the cost of servicing the national debt also rising.

The knock-on effect will be higher spending on social welfare and greater dependency on public services.

The drastic figures are emerging because of:

Growth figures of 2.2pc rather than 3.75pc.
The higher cost of financing the debt.
A shortfall in projected income from taxes.
A statistical change in the way the overall size of the economy is calculated.
Informed sources last night insisted the worsening economic figures were not caused by the €50bn banking bailout.

Pressure from the European Commission and the international markets is also forcing the Government to be less optimistic about its growth forecasts.

As a result, the coalition is having to put forward lower growth figures for 2012, 2013 and 2014, with massive markdowns on previous predictions.

“The markets are sceptical of any forecasts of any country with high numbers for 2012-2014,” a source told the Irish Independent.

The Government’s overall target for cutbacks over the next four years now ranges from €10bn to the extreme figure of €15bn. The €15bn figure was verified by several sources last night.

Until now, the coalition estimated that €7.5bn in savings and cutbacks would be required between now and 2014 to bring the deficit down to 3pc.


But it is now revising its economic growth projections downwards and signalling that deeper cuts will be required.

Various “worst-case” and “best-case” scenarios were outlined to Fine Gael, the Labour Party and Sinn Fein during confidential briefings with the department yesterday.

The mounting cutbacks target also reflects a major reduction in the Government’s growth forecasts. It is now predicting growth of around 2.2pc — compared to last year’s Budget forecasts of 3.75pc for 2011.

And it puts the opposition and government parties under intense pressure to consider wider cutbacks they have previously ruled out.

The cutbacks target for December 7 could be as high as €4.5bn to €6bn, depending on how much “frontloading” the Government believes the economy can sustain.

A range of scenarios, based on different growth rates, was outlined to opposition parties yesterday in the Department of Finance.

Fine Gael’s finance spokesman Michael Noonan said the briefings confirmed the four-year Budget target would be much bigger than previously stated.

Labour’s finance spokeswoman Joan Burton said the figures provided by the Department of Finance were “very challenging”.

Last December, Mr Lenihan said there would be €3bn in cutbacks this year, followed by €2bn in 2012, €1.5bn in 2013 and €1bn in 2014.

That brought the overall cutbacks total to €7.5bn.

Under the revised targets of between €10bn and €15bn, the Government is now looking at having to cut over €1bn more each year than it had originally planned.

A final figure will be announced in the four-year plan due in November.

The briefings in the Department of Finance by secretary general Kevin Cardiff and other senior officials did not cover individual departmental spending, tax measures or social welfare reforms.

These will be covered in future briefings.

One source close to the briefings said the figures revealed were “worse than what we had been expecting”.

“And it’s clear the Government have known for months just how bad the figures were,” the source said.

– Aine Kerr, Fionnan Sheahan and Maeve Dineen

Irish Independent