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Ireland Confident Of Meeting Bailout Targets

by Jason Gorringe,, London

15 July 2011

Ireland's Finance Minister has welcomed the possibility of an interest rate reduction on the country's bailout loans, telling MPs that this is an important step forward as he briefed a committee hearing on the state of the economy.

Speaking before the Select Committee on Finance, Public Expenditure and Reform, on the Finance Group of Estimates and the Stability Programme Update on July 13, Michael Noonan said that there was now recognition among European finance ministers that the interest rates are too high. He referred to a Eurogroup statement which, he said, sets out a commitment to a reduced interest rate, and argued that there is a need for a general reduction applying to all programme countries.

Most importantly for Ireland, Noonan told MPs that there appears to be no quid pro quo required. In Ireland's case, any quid pro quo arrangement would likely be focused on its 12.5% corporate tax rate, which has been a subject of much contention among Europe's finance ministers, with France in particular pushing for an Irish tax rate hike.

Noonan stressed that the government has been consistent in its campaign for a reduction in the interest rate, and said that it has put forward proposals for more flexible policy instruments. The Eurogroup statement is, therefore, "an important step forward in this respect".

Noonan added, "We will continue to argue strongly for an interest rate reduction, as the details still have to be agreed and we cannot afford to take this change for granted. Nevertheless, [the] statement was significant as it stated that all Ministers stand ready to adopt these measures at the EU level, as opposed to the measures being agreed at a country by country level. The details and level need to be worked out though and must be agreed by all euro area Member States. It is not clear at this stage if, when the details become available, they will be acceptable to all Member States."

Noonan's comments were made as part of his general review of Ireland's economic situation, as given to the committee. He said that economic activity has begun to pick up, with the public finances showing signs of stablisation and banking sector reform under way. In spite of this, Noonan was clear that challenges remain, and that the government will need to implement tough budgets over the coming years. Essentially, it must deliver on its European Union (EU)/International Monetary Fund (IMF) bailout Programme conditions, and on time, if the country is to have any hope of returning to the financial market for funding.

He discussed the Stability Programme Update, which all EU member states are required to provide to the European Commission. According to the Update, Ireland can expect growth of 0.8% in 2011, rising to 2.5% in 2012. From 2013-15, the economy is expected to expand at an average of 3% a year. GDP was up 1.3% year-on-year in the first quarter of 2011, and exports had risen 7%. The economy should continue performing strongly, Noonan said, but domestic demand will remain weak, and excessive indebtedness and an over reliance on construction will need to be worked off. The pace at which unemployment is rising has slowed, and, while the unemployment total will increase again this year, it will also do so at a slower pace.

There remain fears about long term unemployment numbers, and Noonan said that his recent Jobs Initiative is making the first steps toward improving the situation, with skills training courses and education initiatives. In addition, Noonan referenced the reduced VAT rate he recently applied to the tourism industry, which fell from 13.5% to 9% at the beginning of July. The Air Travel Tax will also be axed, and a visa waiver programme brought in.

The government will continue to monitor the economic outlook, and provide a further update in October.

Turning to the budgetary outlook, Noonan emphasised the need to close the gap between revenue and government spending. The government has factored in a deficit of 10% this year, which is down from the 12% recorded in 2010. However, government debt remains "very high indeed", at 111%. Noonan argued, "These deficit and debt numbers serve to highlight the importance of continuing to implement budgetary and economic policies to return sustainability to our public finances. This is vital if we want to be in a position to return to sourcing funding from international financial markets at appropriate rates of interest as soon as we possibly can, and before the EU/IMF Programme of Financial Support comes to an end." The ratings agency Moody's downgraded Irish government debt to "junk" status earlier this week, noting that Ireland faces the dangerous possibility of needing another bailout, along with private sector participation in its financial rescue.

The government therefore intends to drive the deficit down to 8.6% next year, which will require an adjustment package of EUR3.6bn. Noonan was clear that the government may indeed have to consider a package above this EUR3.6bn figure as they look through the figures. The precise makeup of the measures needed to make these savings will be decided on later this year. Noonan added that this will not be an easy process, saying "one way or another, the task of restoring sustainability to the public finances will be a long one and further difficult choices will have to be made in this regard in Budget 2012."

The "troika" of the EU, IMF and European Central Bank are currently undertaking their third review of Ireland, under the stability programme. Noonan is confident of the government's ability to meet the bailout requirements, stating that mid year fiscal targets have been met, with tax revenues up and public spending being managed within the government's set limits. With regard to the current review, Noonan said he does "not anticipate any difficulties with the completion of this review and securing access to the drawdown of the next tranche of funds under the Programme".

TAGS: tax | economics | European Commission | Ireland | interest | fiscal policy | banking | budget | International Monetary Fund (IMF) | corporation tax | unemployment | European Union (EU) | Europe

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