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.

Pressure

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

I believe that Fine Gael’s bank policy and recovery jobs policy (Richard Bruton’s website) is clearly better worked out, safer, realistic and more likely to work. I would have acted to guarantee BoI and AIB on 30 september 2008 had I been forced to make the choice at that time and in those circumstances. I thought that Labour was simply wrong then and Nothing has changed my mind. Just read Professor Honohan’s report and make up yopur own mind.

However, Fine Gael should not have fallen in with Fianna Fail so comprehensively at the time. My dog “Fluffy” would have objected to lying down with Anglo Irish Bank. Systemic? No, Professor Honohan, No! Fine Gael’s subsequent policy position is light years ahead of Labour and Fianna Fail. Matt Cooper addresses a numerical conundrum for those who have particular confidence in Noonan, Bruton, Varadkar, Coveney, O’Dowd and Hogan in comparison to Joan and company. I have confidence in Pat Rabbitte and Ruairi Quinn who are economically literate.

The realisation among the public that Brian Lenihan has been a disaster in Finance is slowly becoming apparent. Gormley’s call for a national government is laughable. Call and election John and see if you beat the odds! Gormley’s problems will be Ruairi Quinn, LucyLoo, Clever Andrews and Kevin Humphries. The Incinerator will be built and the issue forgotten about in 18 months. John you will be gored by a bulling electorate.

Matt Cooper’s musings in the Irish Examiner on the Enda Kenny issue are interesting. Enda has worked magnificently for years and does not deserve the shredding he got recently in the Sunday Independent. But as a putative Taoiseach, there is a public interest in Enda that transends the interests of Fine Gael. I hear it everywhere I go. It is the same refrain for years only gathering pace. Can Mark Mortell change the game? This is a very serious issue for Ireland.

We need to grow the economy to close the budget deficit. The national indigenous economy is still contracting or at best standing still. Bruton, Varadkar and Rabbitte – may be able to get things going. I hope so. More to come.

It is terrifying to think that Brian Lenihan’s justifications of the bank
guarantee are factually incorrect, writes FINTAN O’TOOLE

A FORTNIGHT ago, I asked a simple question of the Government: “How much
money for Anglo [Irish Bank] is too much?” Whatever view one takes of the
Government’s banking strategy, this is surely a reasonable question. The
wisdom of any financial transaction obviously depends on the price. Buying
a loaf of bread may make sense if the price is €2. It can’t make sense if
the price is €10.

Minister for Finance Brian Lenihan kindly replied to my article. He
entirely avoided the question. This is surely rather alarming.

The most basic principle that must underlie any Government decision – let
alone one that involves dumping at least €22 billion into a black hole –
has to be a cost/benefit analysis. If you don’t know the cost, if there’s
no upper limit on what you’re willing to pay, then the decision is
implicitly bad. It’s not policy-making. It’s gambling. So let’s ask the
question again – how much money for Anglo is too much?

While he’s answering that question, Lenihan might also address an aspect of
his initial reply that is, if anything, even more disturbing. In the course
of that reply, he made two statements that are, on the face of it,
factually wrong.

The first concerns the views of the governor of the Central Bank, Patrick
Honohan. Lenihan writes: “In his recently published report on our banking
crisis, Prof Honohan . . . endorses the Government’s assessment that ‘a
disorderly failure of Anglo would in the absence of any other protective
action have had a devastating effect on the remainder of the Irish banks’ .
. . On the matter of the guarantee, Prof Honohan said ‘it is hard to argue
with the view that an extensive guarantee needed to be put in place, since
all participants (rightly) felt that they faced the likely collapse of the
Irish banking system within days in the absence of decisive immediate
action’.”

What Lenihan is telling us is that Prof Honohan agreed entirely with the
Government’s decision to extend the blanket guarantee to Anglo – with the
exception of the relatively minor matter of including subordinated debt.

What’s alarming about this is that it bears little relationship to what
Prof Honohan actually says in his report. In fact, while he argues that
some sort of guarantee was necessary (a position that hardly anyone would
dispute), he is critical of the decision to extend a blanket guarantee:
“The extent of the cover provided (including to outstanding long-term
bonds) can – even without the benefit of hindsight – be criticised inasmuch
as it complicated and narrowed the eventual resolution options for the
failing institutions and increased the State’s potential share of the
losses.”

On any understanding of the English language, what Honohan is saying here
is that the blanket guarantee covered too much and in the process increased
the risk of losses for the State.

Equally, and specifically in relation to Anglo, Honohan most certainly does
not endorse a blanket guarantee. What he says is that a “disorderly”
collapse of Anglo would have been catastrophic for the other banks “in the
absence of any other protective action”.

The Government, in other words, could have let Anglo go while saving the
rest of the banking system.

Citing these conclusions in support of Government policy is bizarre. But
even more bizarre is another claim that Lenihan makes in his reply: that
“Merrill Lynch [ML] also recommended a blanket guarantee of Anglo Irish
Bank, including, incidentally, subordinated debt.”

So far as I can see from the available documents, this is simply untrue.

Honohan’s reading of those documents is the opposite of what Lenihan
contends: “There were arguments against a blanket guarantee, including one
made by the Department of Finance’s advisers [ML], who observed that the
assumption of such a large contingent liability would have an adverse
effect on the borrowing costs for the State.”

The Department of Finance’s note of a meeting with ML on September 26th,
2008, (at which Brian Lenihan was present) states that “On a blanket
guarantee for all banks – ML felt could be a mistake and hit national
rating and allow poor banks to continue.”

By “poor banks” they presumably meant Anglo and Nationwide.

In this case, there seems to be only two logical possibilities. One is that
Lenihan has access to a document containing advice from ML that has been
withheld from Honohan and the Public Accounts Committee.

The other is that Lenihan or whoever in his department drafted his reply is
making an untrue claim.

This stuff matters – to the tune of €22 billion – and it is terrifying to
think that the Minister could make such mistakes.

Can I therefore ask Brian Lenihan three questions. Where, exactly (with
page and paragraph references), does Honohan express support for a blanket
guarantee for Anglo? Where, exactly, do Merrill Lynch support such a
guarantee? And, back to the original question: how much money for Anglo is
too much?