Ireland's budget deficit narrows in January

City A.M. Reporter
Ireland's budget deficit shrank nearly 40 per cent in January from the same month a year ago as the government used money raised last year to service its debt mountain rather than tapping the exchequer, the finance ministry said.

Ireland has pledged to radically reduce its shortfall, from nearly 12 per cent of GDP last year to under a European Union limit of three per cent of GDP by 2015 at the latest, under the terms of its EU/IMF bailout.

However the Labour party, likely to form the next coalition government with the Fine Gael party after an election on February 25, said last week that the EU should give Ireland an extra year, until 2016, to bring its deficit into line.

Dublin unveiled a record round of cutbacks and tax increases in its 2011 budget last month but the full impact of those adjustments will not be felt until February because the bulk of income tax receipts in January relate to December earnings.

Much of the drop in January's deficit to €483m (£413m) resulted from a €288m reduction in the cost to the exchequer of servicing the national debt.

This reduction arose after the government was able to tap funds raised last year to make interest payments. The debt management agency has some €600m in reserve to service the national debt in the early part of this year.

Ireland will spend €5bn, or about three per cent of annual economic output, servicing the national debt this year, the Department of Finance said.

Tax revenues in January were nearly two per cent higher than a year ago and the government said it was expecting tax revenues to grow by 9.9 per cent for the year as a whole.

But analysts were doubtful such a target could be met in the face of weak domestic demand and said a new government may have to squeeze consumers further.

"As things currently stand we think it will be a close call as to whether the budgetary targets can be met without further fiscal adjustment in the coming months," said Alan McQuaid, chief economist with Bloxham Stockbrokers.