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Unwelcome metamorphosis

7 December 2011 By Ian Campbell

Ireland’s budget is more of the same – pain that seems without end. The country is making huge efforts, but the Celtic tiger has become a tortoise, weighed down by the collapse of its property bubble and bank bailouts. The unwelcome metamorphosis implies years of fiscal struggle ahead. Ireland seems likely to need more external help.

There’s no question that Ireland is trying very hard. The country’s budget for 2012 seeks fiscal savings worth 3.8 billion euros, or 2.4 percent of GDP. Compare that to Italy’s budget, which implies a tightening of 1.9 percent of GDP, spread over three years.

Ireland’s latest tightening comes on top of several years of austerity. But even then its target deficit for 2012 is still a terrible 8.6 percent of GDP. Barring a sudden leap in growth, more savings will be needed to reduce the budget deficit to 3 percent of GDP by 2015.

There are encouraging indications that Ireland is competitive. Its trade balance has swung into surplus – in contrast with the big continuing trade deficits of Portugal, Greece, Italy and Spain. But the huge fiscal adjustment Dublin must make will drag on the domestic economy, while weakness in the United Kingdom and euro zone will impede exports. Growth will probably be no more than 1 percent in 2012, and modest thereafter.

This means debt pain will endure. The government’s medium-term fiscal statement, prepared in November, forecasts the debt to GDP ratio will peak at 118 percent in 2013. And while Irish government bond yields have narrowed sharply since the beginning of the year, the current yield of 8.62 percent is unpromising for a country planning to return to the bond markets in 2013. That means Ireland will probably need further help from the EU and IMF to cope with its debts.

The country’s fight must be admired but its road is long. The Celtic tortoise, overburdened with deficit and debt, is fated to creep slowly along it.


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