Bailed-out Ireland gets green light to ease up on austerity

DUBLIN Tue Oct 8, 2013 10:09am EDT

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DUBLIN (Reuters) - Ireland's international lenders have given it significant leeway to ease up on austerity in its 2014 budget after it promised to keep hitting all its main targets under a bailout agreement, the government said on Tuesday.

Ireland has been the euro zone's bailout success story and is on track to exit its international aid programme later this year, while other bailed-out countries struggle to hit their deficit targets.

The international lenders' concession demonstrates a recognition by European leaders of the risk that too much austerity might choke off what is still a fragile economic recovery.

Ireland has secured agreement to reduce the package of spending cuts and tax hikes in next week's budget to around 2.5 billion euros ($3.4 billion) from 3.1 billion originally planned, the government said.

"The fact that the figure is fixed at 2.5 billion ... is a victory for the government," Energy Minister Pat Rabbitte told state broadcaster RTE. "There will be 600 million euros less hardship visited on a public that are already suffering for too long."

Rabbitte said the deal was "approved by the troika in our discussions that happened in Brussels over the weekend," referring to Ireland's three lenders: The International Monetary Fund, European Union and European Central Bank.

Ireland has for months argued that it could cut less than the 3.1 billion and still beat its budget deficit target of 5.1 percent of gross domestic product, in part due to slack afforded by a bank debt deal struck with the European Central Bank earlier this year

Some IMF and ECB officials have called on Ireland to stick to the 3.1 billion figure, arguing the money should be held to cushion the weak Irish economy against any shocks ahead of an expected exit from the bailout later this year.

The reduced figure may ease pressure on the ruling coalition. The junior partner, the left-leaning Labour Party, has suffered in opinion polls with its ministers overseeing large cuts to social welfare and education budgets.

Taking less money from the economy may also help the country's recovery from a second recession in five years.

Unemployment has fallen to a three-and-a-half year low, but the economy is still set to stagnate this year, a Reuters poll showed last week.

"The real risk to the Irish public finances is the weakness of economic activity rather than the commitment to do painful things in the public finances," said Austin Hughes, chief economist at KBC Ireland.

"A budget that errs on the side of supporting growth, rather than being more draconian, is probably the right balance to strike and it seems entirely sensible to me to do less damage to the fragile economy.

(Reporting by Padraic Halpin; Editing by Mike Collett-White)

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