By Jack Duffy

PARIS (MNI)- Ireland’s 2012 budget, to be unveiled next Tuesday,
will cut billions of euros to try and hit deficit targets mandated in
the country’s E85 billion plan, amid expectations that sharply slower
economic growth will make reaching those targets a much tougher job.

The budget, as promised by Finance Minister Michael Noonan, is
expected to contain E3.8 billion in spending cuts and tax increases —
including a rise in the top VAT rate to 23% — in an effort to reduce
Ireland’s deficit from around 10.3% of GDP this year to 8.6% in 2012.

Dublin’s dogged effort to stick to the bailout deal struck a year
ago comes as prospects for its export-led economy are shrinking fast. As
the Eurozone debt crisis dampens global growth and threatens to push
Europe into a full-fledged recession, the Irish economy may grow by less
than 1% next year, some forecasters say.

“Europe is the ship and Ireland is just a passenger,” said Austin
Hughes, chief economist at KBC Bank Ireland in Dublin. “If Europe sinks
we go down with it.”

With its domestic economy weighed down by austerity measures,
Ireland’s growth is totally dependant on exports, 40% of which go to
other Eurozone countries, economists say. And the Eurozone economy is
likely to grow by only 0.2% next year, according to the latest forecasts
by the Organization for Economic Cooperation and Development.

The current outlook is in stark contrast with earlier this year
when the government was expecting 2012 growth of 2.5% and Ireland was
being feted as the economic success story of the peripheral bailout
group.

But the government cut its forecast to 1.6% in November, and
unofficial estimates have become increasingly pessimistic. The OECD said
this week it expected Irish growth next year of 1.0%, while the
Dublin-based Economic and Social Research Institute (ESRI) said
Wednesday it expected 0.9%. And economists at JP Morgan said in a recent
research note that they saw no growth at all in Ireland next year.

“It’s like trying to hit a moving target on a foggy night,” KBC’s
Hughes said of Ireland’s efforts to reach its deficit targets. “In any
case, the government has no leeway to do any more at this point.”

The Irish government is committed under its bailout program to cut
the deficit to less than 3% of GDP by 2015. To do that will require a
fiscal tightening of E12.4 billion over the next four years, according
to a budget document released last month. The government said in the
document that it planned to achieve that with E7.75 billion in spending
cuts and E4.65 billion in tax increases.

Economists say Ireland can still meet its deficit target in 2012 if
the Eurozone economy does not deteriorate much further, but it is being
pushed closer to the “negative feedback loop” experienced by Greece and
Portugal, in which weaker growth leads to more fiscal tightening which
leads to even weaker growth.

“The worrying thing is that Ireland has a very weak domestic
economy and the government is still looking for more measures to close
the gap between revenue and spending,” said David Duffy, an economist at
ESRI and one of the authors of Wednesday’s report.

Bond markets are reflecting the fears. Yields on 10-year Irish
government debt, which peaked at more than 14% in July and subsequently
fell to less than 8% in late September, have now crept back above 9%.
And the yield curve has inverted, a sign that investors have begun to
factor in higher short-term credit risk.

Brian Devine, chief economist at NCB Stockbrokers in Dublin, said
Ireland’s official lenders should give the government some leeway if it
misses its deficit targets because of a dramatic weakening in the global
economy.

“As long as Ireland shows a willingness and a commitment to put the
necessary measures in place, you would hope that the troika would not
immediately come in asking for more,” he said, referring to fiscal
inspectors from the International Monetary Fund, the EU and the European
Central Bank.

The troika completed its fourth review of Ireland’s bailout program
in October and concluded it was on track. Troika inspectors are
scheduled to return to Dublin in January.

Duffy said ESRI expected Ireland to reach its deficit targets in
2012 but that if the Eurozone crisis deepened the rest of the program
could be in doubt.

“If the crisis were to continue, there would have to be a review of
all countries’ targets — not just Ireland,” he said.

–Paris Newsroom, +3314271-5540; jduffy@marketnews.com

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