Possibility of 'spare capacity' next year - Michael Noonan

Tuesday 23 April 2013 19.11
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Finance Minister Michael Noonan says Government can't embark on ''spending spree''
Finance Minister Michael Noonan says Government can't embark on ''spending spree''
European Commission President Jose Manuel Barroso says austerity had reached its natural limits of popular support
European Commission President Jose Manuel Barroso says austerity had reached its natural limits of popular support

Finance Minister Michael Noonan has said if there is spare cash after next year's Budget, it will be used to grow the economy and create jobs.

On his way into Cabinet this morning, Minister Noonan said there is the possibility of "spare capacity" next year.

But he said the Government has to stick to the targets and can not go on a "spending spree".

The comments come a day after European Commission President Jose Manuel Barroso said that austerity had reached its natural limits of popular support, a signal that Europe is contemplating some easing up on its cornerstone policy of sharp budget cuts.

Outlining the state of Europe's accounts in 2012, the EU's statistics office Eurostat said yesterday that France posted a deficit of 4.8% of economic output, higher than its 4.5% target. Spain's shortfall was the largest in the EU.

With budget cuts blamed for a second year of recession in a row, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed.

Mr Barroso said yesterday that austerity had reached its natural limits of popular support. "While I think this policy is fundamentally right, I think it has reached its limits," he told a conference. "A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support."

Budget cuts have been at the centre of the euro zone's strategy to overcome a three-year public debt crisis but they are also blamed for a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have little hope of finding a job.

Crippling levels of unemployment and outbreaks of violence in southern Europe are now forcing a rethink, with the focus shifting to economic growth strategies.

Despite cuts and tax increases, Spain's budget shortfall was 7.1%, excluding bank recapitalisation, higher than the government's 6.98% official end of the year reading and well above Madrid's original target of 6.3%.

Adding in the cost of recapitalising Spain's banks and a €40 billion bank bailout from the euro zone, Spain's deficit was nearly 11% in 2012, higher than the European Commission's forecast of 10.2%, and an increase from the 9.4% deficit of 2011.

That was higher than Greece, and the highest in the EU.

The euro zone's combined sovereign debt burden also hit a record of 90.6% of GDP in 2012, Eurostat said.

The shift in austerity policies is backed by an improving picture overall, however. The euro zone's combined fiscal deficit was 3.7% of gross domestic product, compared with 4.2% in 2011 and 6.5% in 2010.

Partly as a result, both Spain and France are expected to get more time to reach EU-mandated targets of 3%.

"We need to combine the indispensable correction in public finances, huge deficits, huge public debt ... with proper measures for growth," Barroso said.

EU leaders are desperate for economic growth, and the Commission will decide on May 29 whether to recommend to EU finance ministers to give Paris and Madrid until 2015 to cut their fiscal gap to 3% of GDP, today targeted for 2014.

It is not yet clear just how big a policy shift EU policymakers are planning.

Rehn, the EU's economic and monetary affairs commissioner, said last week that financial leaders from the group of 20 economies calling for less austerity were "preaching to the converted."

He is looking increasingly at countries' fiscal efforts in structural terms, which means removing the effects of the business cycle and one-off measures on the budget.

But Germany and the European Central Bank want to see the euro zone put its finances in order after a decade of borrowing when countries' debt and deficit levels rose dramatically.