Under the terms of the bailout, the government has committed to cutting €3.5 billion out of the economy next year through tax rises and spending cuts. That’s in a bid to cut the budget deficit to 7.5% of the total output of the economy.
However, the overall size of the economy, gross domestic product, is going to be lower than the government had forecast. If that is the case then the size of the cuts and extra taxes needed to meet the deficit target is going to be higher.
The European Commission this week cut its estimate of economy growth this year to just 0.4%. That will have little impact on forthcoming budget but it was the eye-catching cut to next year’s forecast that will be of concern. The Commission now expects the economy to grow by just 1%, well below the 1.8% it had predicted.
At a Dáil committee yesterday the finance minister Michael Noonan said the government was on track to meet its budget targets for this year. But on the question of what happens in 2013 he kicked for touch, telling TDs that updated forecasts will be released by the department soon. He did admit, though, that that short-term “growth prospects will be weaker than previously anticipated”.
I understand this new budget outlook will come out by the end of next week. The numbers would suggest that quite a bit more pain is in store in December. Economists at Davy stockbrokers reckon it could amount to an extra €400 million.
It’s now up to Noonan and his colleagues around the cabinet table to find that. The plan had been to slash spending by €2.1bn and find the rest through tax increases such as a property tax and raising vehicle registration tax.
Given the domestic economy is on the floor and there is a commitment in the programme for government not to raise direct taxation rates it will be difficult to spending any extra money through hiking taxes.
That leaves public expenditure. Again there’s a commitment not to touch public sector pay or social welfare rates.
With those constraints it’s going to be an awfully comfortable few weeks for the government. And quite a difficult time for everyone else.
Ian Guider – Business Editor
You can follow Ian on Twitter: @ianguider
Ian is Newstalk’s Business Editor and presents Business Breakfast every weekday from 6:30-7am only on Newstalk 106-108fm
