Brian Cowen, the Irish Prime Minister, will unveil a four-year plan next month for tackling the worst budget deficit in the EU and prospects of a recovering domestic economy helping to narrow the gap appear remote.
The central bank cut its growth forecast for Gross Domestic Product (GDP) this year to just 0.2 per cent from 0.8 per cent previously and said that, given international fears about Ireland’s finances, the government could not shy away from steeper cuts despite the bleaker outlook.
But analysts warned a continued diet of bad news on the economy for Ireland’s recession-weary consumers could tip the country into another slump. “Against the background of sharply increased concerns about fiscal sustainability, the main priority in the short term is to ensure that the 2011 budget credibly demonstrates the first step of a reprogrammed tighter fiscal plan,” the central bank said in its latest quarterly bulletin.
Cowen shocked taxpayers last week when he revealed they may end up with a clean-up bill of up to €50bn (£43.2bn) following years of reckless bank lending during the boom years of the “Celtic Tiger” economy.
The bank bill will quadruple Ireland’s debt levels from 25 per cent of GDP before the crisis to an estimated 99 per cent and means Cowen will have to make fiscal adjustments next year above an initial target of €3bn.
The premium investors demand to hold Irish debt rather than German Bunds, which blew out to a record 475 basis points (bps) last week, has narrowed since and eased further to 415 bps yesterday on the prospect of Irish pension funds buying bonds. The central bank is hoping consumer demand will slowly start to pick up next year.