Ireland announced a deepening austerity drive Friday, committing itself to cut euro3.8 billion ($5.2 billion) from its 2012 deficit and to keep increasing taxes and slashing spending through 2015 to meet the terms of its international bailout.
Finance Minister Michael Noonan said the rising level of cuts and tax increases outlined in his 2012-15 fiscal plan are needed for Ireland to claw its 2015 deficit back within 3 percent of gross domestic product, the key target in last year's bailout deal.
"The large gap that still exists between government spending and revenue must be closed," Noonan told a Department of Finance press conference. "Continuing to run big deficits and engaging in the high levels of borrowing required to fund them is simply not viable. To do so would result in unsustainable debt and a long-term loss of sovereignty."
Ireland in November 2010 was forced to negotiate a potential euro67.5 billion ($92 billion) credit line from the European Union and International Monetary Fund after the nation reached the brink of bankruptcy over its runaway bank-rescue program. Ireland already has drawn down nearly half of that funding. EU and IMF monitors have lauded Ireland's commitment to fight its deficits as part of the deal.
Even before seeking international aid, Ireland was the first of Europe's debt-struck nations to impose emergency austerity budgets after its ill-regulated banks began to buckle in 2008 amid imploding property markets in Ireland, Britain and the United States. Irish banks were exceptional risk-takers in all three markets. The government ended up nationalizing five banks at a cost to taxpayers expected to top euro70 billion ($100 billion).
The planned 2012-15 cuts run deeper than previously expected, in part, because Ireland has trimmed its growth forecasts in line with continued depression in consumer demand and rising uncertainty in its key American and European export markets.
Ireland lowered its 2012 growth projection to just 1.6 percent versus previous expectations of 2.5 percent. Average growth for 2013-15 also was reduced from 3 percent to 2.8 percent, a figure that many economists said still looked too rosy.
Friday's plan presumes that consumer demand will not recover soon in a country where households often are fearful of losing their jobs, mired in negative-equity mortgages, and struggling to pay rising bills on reduced incomes.
It expects consumer demand to keep declining a further 1 percent next year, versus a previous assumption of flat growth. And demand in 2013 now is expected to be flat, versus previous hopes of a 1 percent uptick.
Noonan said deficit reduction in 2012, to be detailed in his budget Dec. 6, would involve euro1.6 billion in tax increases and euro2.2 billion in spending cuts.
He said a further euro3.5 billion would be cut from the 2013 deficit, euro3.1 billion in 2014, and euro2 billion in 2015. In total, the planned euro12.4 billion in deficit cuts over the next four years would involve euro4.65 billion in tax increases _ or more than euro1,000 for every man, woman and child in Ireland.
Such cuts, he said, were forecast to reduce Ireland's deficit for 2012 to 8.6 percent of GDP; for 2013 to 7.5 percent; 2014 to 5.1 percent; and 2015 to 2.9 percent.
Noonan conceded that the cutting and tax hikes were suppressing economic growth, but said Ireland had no choice but to bite the bullet hard. He said Ireland's unemployment rate, currently near a 17-year high of 14.4 percent, would improve only once consumer spending grows from 2014 onward.
"The likelihood is that exports will remain the only significant source of positive momentum in the economy for the next couple of years," he said, referring to Ireland's 1,000-strong stable of foreign high-tech companies, which generate a growing proportion of tax revenues but relatively few jobs.
Business leaders welcomed the size of the planned deficit cuts as necessary, but warned that the government should press harder for spending cuts, rather than hiking taxes.
"International evidence shows that tax-based austerity is more harmful to economic growth and employment than current expenditure reductions," said Danny McCoy, director of the Irish Business and Employers Confederation, the main lobbying group for Ireland's more than 7,000 businesses.
Finance Department plan, http://bit.ly/sFmgZ2
Noonan statement, http://bit.ly/sRFKsL