Significance: Ireland has presented another ambitious and aggressive fiscal consolidation plan, for the period 2011–14.

Implications: With the plan including a value-added tax increase, a reduction in the minimum wage, the abolition or curtailment of some tax breaks, and further cuts in social transfers, households will suffer the most.

Outlook: Ireland is relying on an export-led recovery as the latest measures do little to help the domestic side.

Risk Ratings

Following the publication of this budgetary plan, the dependency on exports has increased and so has Ireland's economic risk, should the recovery in core Europe and the encouraging rebound in the United Kingdom falter. As a result, IHS Global Insight has downgraded Ireland's Economic Risk Rating from 2.75 to 3.00.

Ireland yesterday presented another ambitious and aggressive fiscal consolidation plan, for the period 2011–14. The fiscal adjustment remains unchanged from the figure previously anticipated: a total of 15 billion euro (US$20 billion) for the entire period, with 6 billion euro in 2011 (or 40% of the adjustment) and the remaining 9 billion euro over 2012–14. The 15-billion-euro adjustment will be made up of 10 billion euro in spending reductions and 5 billion euro in tax and revenue-raising measures.

Summary of Tax and Expenditure Measures

On the expenditure side, the package includes 7 billion euro of current spending cuts and 3 billion euro of capital spending cuts. More specifically, the government has announced the following measures:

Savings in social welfare expenditure of 2.8 billion through a combination of enhanced control measures, labour activation, structural reform measures, a fall in the Live Register, and, if necessary, further rate reductions.

Cuts in public service staff numbers of 24,750 over 2008 levels, back to levels last seen in 2005.

A reduction in the public-sector pay bill of about 1.2 billion euro between 2010 and 2014.

A reformed pension scheme for new entrants to public service and a reduction in their pay of 10%.

The introduction of a pension deduction for public service pensioners, yielding 100 million euro in savings.

A reduction in non-pay and non-social-welfare spending by 3 euro billion over the period.

An increase in the student contribution to the costs of higher education.

A reduction in the minimum wage by 1 euro to 7.65 euro an hour.

Indeed, the bulk of the savings will come from major drivers of spending, including public service pay and pensions, social welfare, public services including student aid, free or subsidised medical care and treatment, and public investment.

On the revenue side there is not much to report. The corporate tax rate has not been increased as it is seen as a "confidence building measure", according to Ireland's prime minister. Some tax breaks will be abolished or curtailed and value-added tax (VAT) will increase from 21% to 22% in 2013 and 23% in 2014.

Behind the Headlines

This latest four-year austerity plan, on the face of it, looks to be reasonable as the headlines numbers are ambitious enough and meet everyone's expectations. However, the problems arise when looking at the sectors of the economy that will have to contribute to the fiscal adjustment. With VAT increasing, the minimum wage being cut, some tax breaks being abolished or curtailed, and social transfers being reduced further, households will suffer the most. They will also be affected by the reduction in public-sector jobs and cuts to public-sector pay.

Moreover, the government's growth projections look optimistic. It forecasts average economic growth of 2.75% between 2011 and 2014. According to the official statement, the four-year budgetary plan will bring the public deficit down to 9.1% of GDP in 2011. The debt-to-GDP ratio is seen peaking at 102% in 2013 and is expected to fall to 100% by 2014.

Outlook and Implications

Ireland's four-year austerity plan will hit households hard. Therefore, the first consequence of the announcement might be the acceleration of the downward trend in consumer confidence that began three months ago. Indeed, IHS Global Insight already expected very little from private consumption, but these latest budgetary measures mean that the outlook for the sector has deteriorated further. Moreover, there is likely to be some social unrest in response to the plan.

Moreover, Ireland is relying on an export-led recovery as the latest measures do little to help the domestic side. Indeed, the economy's dependency on the external performance has increased following the publication of this budgetary plan, and so has Ireland's economic risk, should the recovery in core Europe and the encouraging rebound in the United Kingdom falter. As a result, IHS Global Insight has downgraded Ireland's Economic Risk Rating from 2.75 to 3.00.

Finally, we currently forecast the Irish economy to almost stagnate in 2010 and to post average GDP growth of 2.65% for the period 2011–14, slightly below the government's current forecast of 2.75%. However, in light of these budgetary measures, this projection will have to be lowered in our next forecast round.