European Commission raises deficit forecast to 7.6% of GDP

Monday 30 September 2013 23.12
There was a fall in exports and domestic spending in the first quarter of the year
There was a fall in exports and domestic spending in the first quarter of the year

A European Commission staff working document on the latest review of Ireland's bailout programme says there is a risk the State will not hit its deficit target of 7.5% of GDP this year.

In a leaked draft report, European Commission staff said they have raised their baseline forecast for the general Government deficit to 7.6% of GDP.

However, the International Monetary Fund said last week it expects the deficit to come in at 6.8%.

The difference between the two programme lenders may be due to different treatments of the €1.1 billion cost of the liquidation of IBRC.

The commission's gloomier view reflects the fact that GDP has not grown at the level anticipated at Budget time, due to a fall in exports and domestic spending in the first quarter of the year.

The fall in domestic spending has also led the commission to revise its estimate of tax revenues, notably an underperformance in VAT.

Other tax elements are largely unchanged from the tenth review document.

In an economic analysis, the commission has revised its growth forecast for 2013 to 0.6%, compared with 1.1% at the previous review.

Inflation is also weak, helping to keep nominal GDP growth down lower than previously expected. GDP is forecast at €166.6bn compared with a forecast of €167.5bn in the previous review.

The commission says it expects further Budget pressures to come from the healthcare sector, due to delayed implementation of some Budget measures.

It says the Government has reiterated its commitment to use contingency measures if needed to keep overall spending within agreed limits.

It also says the State may have to make up any shortfall that arises from the liquidation of IBRC, the former Anglo Irish Bank and Irish Nationwide Building Society.

The State is liable for any difference between the price paid by NAMA for IBRC assets and the price for them set by an independent valuation.

The use of shares by AIB instead of cash to pay a dividend to the state (worth 0.2% of GDP) may also backfire, as Eurostat may reclassify the transaction not as a dividend payment to the State, but as a deficit increasing transfer by the State to AIB.

The statistical treatment of the AIB dividend continues to be discussed between Eurostat and the Irish authorities.

The report notes the last stability programme update from the Government last April stated the adjustment in Budget 2014 was to be €3.1 billion and €2 billion in 2015.

In a section dealing with the mortgage arrears situation, the commission says further delay in dealing with mortgage arrears are a "considerable drag on the recovery of the domestic economy".

It says a sustainable solution that does not involve legal action is usually in the best interests of both parties, as legal actions are costly for both sides, and revised payment terms under a new arrangement "can in most instances be more affordable than renting for the customer".

Nevertheless, it says an effective and efficient repossession regime has a role to play in sorting out the arrears crisis.

It notes recent legislative and regulatory reforms to facilitate the legal process with repossessions, but says it is concerned that the judicial system may be unprepared to deal with an increased caseload.

It says that while safeguards have been put in place to keep co-operating borrowers in their homes, "given the number of non-cooperating borrowers, particularly in investment properties, an increase in the number of repossessions from the very low levels experienced in recent years is likely".

Last week, the Government published the memorandum of understanding with the Troika, in which it said it would look at using a commercial court-like system for fast-tracking repossessions of buy-to-let properties.

The report says such a system would reduce the cost of buy-to-let repossessions "and would allow the banks to focus their resources on working with co-operating borrowers to find solutions".

On the issue of tracker mortgages, the report simply notes that the "the authorities continue to explore feasible options to lower the drag on bank's profits from tracker mortgages".