Being Best in Bailout Class May Not Be Enough for Ireland
Staff Writer, CNBC.com
The Irish government announced a budget targeting the country's rapidly shrinking wealthy population on Wednesday, but this still may not be enough to win the bailed-out country further concessions from its international lenders, economists have warned.
"The government is looking for Brussels to acknowledge their progress with some form of accommodation," Philip O'Sullivan, chief economist at Dublin-based NCB stockbrokers, told CNBC.
"Ireland doesn't need anything approaching the sort of help Greece does."
As Greece has wrung concessions from its lenders by threatening to topple into defaulting on its payments, Ireland has won praise by hitting its deficit targets and avoiding the social unrest seen in the Mediterranean country, and has even been able to return to the bond markets.
The country has undergone rebalancing equivalent to 25.3 billion euros ($33 billion) or approximately 15.5 percent of gross domestic product since the crisis began, a bigger sum than anywhere except Greece. Yet it has not won any changes to the terms of its bailout by the troika of the International Monetary Fund, European Central Bank and European Commission.
The Irish government has committed to keeping similar spending levels on social care and welfare, as well as public sector pay and staffing – so has been left with limited flexibility if it sticks to these promises.
A new property tax, which could raise as much as 500 million euros ($653 million) for the state coffers, was the big announcement, but the amount could be lower because of exemptions, according to O'Sullivan.
"While spending has been disciplined, health and social spending have been far above budget, and both are demand driven so difficult to limit," O'Sullivan said.
"A lot of benefits are universal and you could see exemptions made for the wealthy elderly, for example."
Pensioners who have incomes of more than 60,000 euros annually are facing cuts to their electricity and gas benefits as well as the removal of a tax exemption.
The budget also included a rise in university fees, increased taxes on alcohol, cigarettes and cars, and reductions in child benefit, with a total of 3.5 billion euros worth of spending cuts and tax rises.
"The markets should be impressed to see the Irish Government remaining so firmly committed to the troika program, continuing to adopt measures, that while politically divisive and socially unpopular, many other countries have thus far refused to countenance," Owen Callan, senior fixed income strategist at Danske Bank Markets, said.
