DUBLIN (Reuters) - Ireland promised austerity-weary voters that a debt deal struck with euro zone partners will help limit budget cuts but a better fiscal position depends on European growth, leaving the government still facing a risk of continued stagnation.
Prime Minister Enda Kenny hailed Thursday’s long-awaited accord with the European Central Bank as an “historic step” on the road to economic recovery. By giving it much longer to repay debts it ran up in rescuing the Irish banking system, the deal sent state borrowing costs down to levels they were at when the financial crisis struck.
It also puts the government on course to emerge this year from the strictures imposed when it took an EU/IMF bailout and both Kenny and finance minister Michael Noonan pledged that voters would see the benefits through a 20-percent reduction in 5.1 billion euros of austerity measures planned by 2015.
Others, including the European Commission, might prefer Ireland to stash away the money it is saving in debt servicing as a cushion against shocks, and the country’s central bank governor gave a cautious response to the government’s plans.
“I certainly did not have in mind any sort of budgetary consequences,” Patrick Honohan, who, as Ireland’s member of the ECB Governing Council brought forward the deal, said when asked about the government’s pledge.
“The budgetary pressures are there. They come from a lot of sources, not just this promissory note. This is an important element of the budgetary pressure that has been relieved but there is still a lot of fiscal adjustment to be done and we will be in discussion on budgetary strategy.”
However within government ranks, Noonan was already coming under political pressure on Friday to make fiscal concessions.
“It will have to manifest itself in the budget, otherwise it’s just talk,” said Michael Conaghan, a member of parliament for Labour, the junior coalition partner of Kenny and Noonan’s center-right Fine Gael party.
“We need to see some tangible, practical benefits in the budget that ordinary people can see in their own lives - that is their expectation,” said Conaghan, who represents an inner Dublin community hard-hit by the country’s financial collapse.
“Certainly we backbenchers will be trying to ensure that this happens,” he told Reuters. “Simply to hold it all back in case there’s another rainy day ... We have to lift some of the rain that fell on us for the last six or seven years.”
With unemployment stuck above 14 percent for the past 2-1/2 years and one in six home loan borrowers unable to meet their full payments, relief from a relentless austerity drive that began six years ago would help the struggling domestic economy.
But officials in Noonan’s own department cautioned that the leeway this week’s deal provides is just one variable feeding into the budget, highlighting this year’s tax take, the ability to curb spending and events abroad as being among the others.
After Dublin beat last year’s budget deficit target of 8.6 percent of annual output, still among the highest in Europe, the country’s central bank warned that it should not ease up on its fiscal adjustment plans.
That is because weaker foreign demand will continue to hit the export-led economy this year, it said, and although Ireland has avoided joining much of the euro zone in recession, the bloc’s debt crisis has forced it to consistently scale back growth forecasts.
To reduce its budget deficit to the EU-required level of 3 percent by 2015, Dublin needs economic growth to jump to 2.5 percent next year from an estimated 0.9 percent in 2012.
Rating agency Fitch said the debt deal was positive, easing medium-term fiscal pressure, but that the same risks remained as when it raised its outlook on Ireland’s rating to stable in November, including a weak growth outlook.
A Reuters poll of economists also showed that Ireland’s economy was likely to grow by 1.3 percent this year, down from a forecast of 1.5 percent in a survey in December.
A member of the Irish Fiscal Advisory Council, the country’s independent budget watchdog, said that whatever the domestic political imperatives, pressure would be brought to bear to stick to austerity “Plan A” and use the extra cash as a buffer.
“Politicians, especially moving into the second half of their administration, are going to be inclined to ease up on the adjustment so they will want to use as much money as possible to ease off on austerity,” Alan Barrett said.
“But they will have people like the Fiscal Council to answer to; the European Commission will have an input; and the Council has been arguing that our debt sustainability, even with this, is far from secured. There may be an argument for using some of the extra billion to accelerate the pace of adjustment.”
Analysts say the coalition, which is starting to feel the heat in opinion polls, will be tempted to spend the windfall. A general election is due in just over three years.
“The only thing that was going to bring this government down was maybe the absence of a deal that would have put pressure on coming up to the next budget,” said Eoin O‘Malley, a politics lecturer at Dublin City University.
“But if you don’t see some sort of tangible outcome at the next budget, then there’s no point in having this deal.”
Reporting by Padraic Halpin; Editing by Mike Peacock and Alastair Macdonald