Irish divisions rise over next austerity budget

Divisions rise in Ireland's coalition government over size of next budget cuts

Associated Press

DUBLIN (AP) -- Splits are emerging in Ireland's coalition government over the scale of the next round of budget-cutting, a core part of the country's bailout deal.

Deputy Prime Minister Eamon Gilmore, who leads Ireland's left-wing Labour Party, declared Tuesday that Ireland should trim its planned 3.1 billion euros ($4.1 billion) in tax hikes and spending cuts expected in the 2014 budget being published Oct. 15.

Gilmore's position clashes with the other government party, Fine Gael, and Ireland's key creditors: the European Union, European Central Bank and International Monetary Fund. Negotiators from the so-called "troika" are expected to return to Dublin after next month's budget to agree on plans for Ireland's anticipated bailout exit in December, when the existing loans run out.

Ireland was forced to negotiate the three-year bailout after its bill to sustain six debt-crippled banks swelled to 64 billion euros and destroyed the state's own creditworthiness.

In 2011, the newly elected government of Prime Minister Enda Kenny agreed with its creditors to a series of budget targets through 2016 designed to reduce deficits below the EU limit of 3 percent of gross domestic product. Finance Minister Michael Noonan backed up those commitments with specific budget-adjustment figures, including 3.1 billion euros for 2014.

Many economic analysts are warning that an Irish failure to stick to previously agreed austerity targets would undermine confidence and drive up borrowing costs right at the exact moment the country hopes to resume auctioning its bonds on the open market.

Gilmore argued that recent Irish successes in renegotiating the repayment terms of its bank bailout debts meant Ireland would have potentially 1 billion euros more than previously expected for 2014. He also cited recent forecasts suggesting that Ireland could meet its 2014 deficit target of 5.1 percent of gross domestic product with potentially 2.7 billion euros in cuts and tax hikes.

"Some commentators are saying to us: Well you're doing great, keep it up, do the 3.1 billion anyway, even if the 3.1 billion is more than is necessary to meet your (deficit) target," Gilmore told Irish state broadcaster RTE. "... I don't think there is a case for that."

Gilmore has political leverage, because Kenny's government cannot survive without Labour backing. Gilmore's union-dominated party, slumping in opinion polls, fears electoral annihilation if it is unable to ease the pain of benefit cuts and tax hikes.

Irish Central Bank governor Patrick Honohan argued that the government should keep lowering its deficits as quickly as possible, exceeding previous targets if possible, because this would make the bond-market return easier and give cash-hoarding consumers a sense that the days of austerity might be ending.

"The sooner the fiscal adjustment is completed, the sooner these elements of uncertainty will be removed, paving the way for reduced private saving and increased consumer demand flowing into the local economy," Honohan wrote in an Irish Times opinion piece.

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