29 November 2010

Commission forecast for Ireland

Moreover, in the course of 2010, the extent to which Irish banks' excessive exposure to the construction sector has weakened them after the bursting of the real estate market bubble led to drastic valuation losses has become increasingly visible. Starting in 2008, the Irish authorities had put in place several measures to support the sector, including a blanket guarantee, large capital injections, the full nationalisation of one bank, and the establishment of the National Asset Management Agency (NAMA), a "bad bank" to  deal with banks' property-related impaired assets. The need to support the vulnerable financial sector has greatly exacerbated the deterioration in the public finances. Uncertainty about the total cost of the support and its implications for the sustainability of public finances led to increasing nervousness in bond markets in the second half of 2010, reflected in soaring Irish sovereign-bond spreads. In response, the Irish authorities presented  in late November their detailed and comprehensive four-year fiscal consolidation plan to stabilise debt  developments and reduce the deficit to 3 per cent of GDP by 2014. While inevitably imposing some pain, this plan aims at restoring confidence – a prerequisite for the return to sustainable growth – and will thereby shape economic developments over the forecast horizon.

In 2012, the deficit ratio is projected to decrease to 9.1 per cent of GDP taking into account broad consolidation measures of 2.2 per cent of GDP. The expenditure ratio should decline by 1½ pps of GDP taking into account a nominal freeze of expenditure and rates together with consolidation measures of 1.2 per cent of GDP across main expenditure items. Despite further tax revenue increasing measures amounting to 0.9 per cent of GDP, the revenue-to-GDP ratio is expected to only see a minor improvement given still negative domestic demand, lower fees from the bank guarantee scheme and a smaller dividend from state bodies after frontloading in 2011. A sharp  increase  in the gross-debt-to-GDP ratio from 65 per cent in 2009 to 97 per cent in 2010 reflects the large primary deficit, including bank rescue measures, rising interest expenditure and falling nominal GDP. In particular, promissory notes contribute almost 20 pps. to the increase in the debt ratio in 2010. However, the government deficit and debt is subject to further risks related to banking sector recapitalisation needs. Gross debt is projected to rise to 114 per cent of GDP by 2012.

Full forecast (Ireland)

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