Economy Slump Sends Govt Finances Reeling

Amid rising unemployment and a serious downturn in economic performance, the Irish government now faces a complete re-evaluation of its own finances. By the first five months of 2008, tax returns fell 1.2 billion euros short of returns projected. The situation deteriorated even more rapidly over the next months, so that by the end of the year Taoiseach (Prime Minister) Brian Cowen was discussing a shortfall in the region of 8 billion euros. The Economic and Social Research Institute (ESRI), an independent think-tank, predicts the government deficit will rise to 10.2 percent next year. In one of its gloomiest assessments for decades, the ESRI forecasts 117,000 job losses in 2009, with unemployment set to rise to 9.4 percent from its present 6.9 percent rate. It also predicts a return to net outward migration, estimating that some 50,000 people will emigrate from Ireland next year. The speed of the downturn has surprised many, including the government. Since taking up the office of Taoiseach from Bertie Ahern, Cowen has encountered a series of economic crises in which the Irish state, booming five years ago, now faces a far from certain future. With tax returns for 2008 leaving government funds far tighter than expected, Finance Minister Brian Lenihan announced a series of public spending cuts prior to the budget. The total package aimed to save 440 million euros, with most government departments expected to reduce their payroll bill by three percent by the end of this year. Pay increases due to senior civil servants, including ministers and judges, were deferred and public expenditure on the stalled decentralization program was also put on hold. Advertising and consultancy budgets were cut by 50 percent. Some 45 million euros was shaved off the 2008 budget to Overseas Development Aid. Following these cuts, the government introduced the budget six weeks earlier than usual in an attempt to address some of the shortfall. However, the budget failed to deal with underlying problems and was widely regarded as a rushed, poorly-planned document. Instead of galvanizing the public into a keener sense of economic reality, it created huge public protest by attacking universal medical care for pensioners and making educational cuts in disadvantaged sectors. Forced to make politically embarrassing U-turns on a number of measures, the government then faced an even greater crisis when insecurity on the worldwide financial markets threatened the very future of Irish banking. After an all-night emergency meeting with the heads of the four major banks, the Taoiseach and Minister for Finance Brian Lenihan announced that the Irish government would guarantee the security of savings of account holders. Smaller banks operating in Ireland challenged the measure on the basis of fair competition, so the government was obliged to extend the scheme to cover all banks. It was a radical and expensive move, exposing the Irish exchequer to a financial risk of 400 billion euros, about double the size of the state's gross domestic product (GDP). However, the state guarantee on savings was not enough to prevent a steady decline in the value of bank shares. Nor could it ease the ongoing difficulty for Irish banks gaining access to international money markets. In response the Finance Minister announced that the government would recapitalize the banks to the tune of 10 billion euros on a loan from the national pension fund "on terms that will ensure a full return to the taxpayer and to the pension fund. "There will be no exposure to the taxpayer on this because as a result of the good times we do have substantial money amassed in the pension fund, so there is no question of fresh expense being incurred in this operation," said Lenihan. Drawn heavily into the banking crisis, the government then found itself dealing with another unexpected problem in agriculture when a serious contamination of animal feed brought the entire pork industry to a halt. The problem was traced to one animal feed provider in Co. Carlow, where machine oil was somehow allowed to get into the feed mix. Although the problem was very localized, the government immediately banned the sale of all Irish pork products until health authorities were satisfied that Irish pork was safe for public consumption. It was an effective response, but many analysts felt the issue could have been dealt with at a local level in the farms affected instead of closing down production at 400 pig farms around the country. Once the scare was averted, pork production resumed for markets at home and abroad, although the cost of what was a very avoidable crisis is estimated at close to 500 million euros. With government finances already stretched, Finance Minister Lenihan faces more difficult days ahead. Every major capital scheme will be reviewed, including the proposed rail corridor linking Galway and Limerick and the extension of the LUAS rail network to Dublin airport. Smaller projects have already been put on hold, including a 15-million-euro renovation of the National History Museum on Merrion Street in Dublin. The 150-year-old building has been closed to the public since July 2007 when ten visitors were injured following the sudden collapse of a staircase. With unemployment set to rise and tax returns certain to shrink, the government will inevitably return to borrowing. Despite a period of unprecedented economic growth, public borrowing rose to 13 billion euros in 2008. The ESRI forecasts that borrowing will be closer to 20 billion euros this year and national debt will almost double where it stood at the end of 2007.

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