– EC expects Irish GDP to expand 0.9 percent next year
– Ireland forecast GDP growth of 1.75 percent next year
– Growth after banking crises is particularly tough
The extension of Ireland's deadline for plugging its budgetary black hole has underlined just how optimistic its growth forecasts were and the threat of a prolonged recession which would make its debt targets even harder to achieve.
The European Commission forecast on Monday that Irish gross domestic product (GDP) would grow by just 0.9 percent next year, roughly half the level pencilled in by the government just a few weeks ago, and a fraction of the 3.25 percent Dublin was originally forecasting.
Brussels' bleaker assessment shows why it and the International Monetary Fund gave Ireland an extra year, until 2015, to get the worst budget deficit in Europe back within the EU's 3 percent limit, as part of their 85 billion euro rescue package.
Even the extra room for manoeuvre may not be enough given that Ireland needs to impose unprecedented cutbacks and tax increases, totalling 15 billion euros over four years, as part of the bailout deal.
"I thought on previous experience of the IMF going into other countries that the IMF wouldn't want to leave a corpse behind, it would want to revive the Irish economy," said Pat Rabbitte, the opposition Labour party's spokesman on justice.
"I'm not sure if this deal can be delivered on. I'm puzzled as to how we can make it work," Rabitte said.
Economists have warned that a renewed cycle of austerity, on top of two preceding years of cutbacks, risks tipping Ireland into a prolonged downturn, affecting its ability to raise enough tax revenues to get its deficit below the EU threshold by 2015, let alone 2014.
Prime Minister Brian Cowen, who will likely be voted out of office early next year, is hoping a recovery in the world economy will lift Ireland, one of the most trade-dependent nations in the world, given the presence of so many large exporting multinationals in the country.
Such companies contribute to the Irish economy through tens of thousands of jobs and payment of a low corporation tax of 12.5 percent, accounting for around 10 percent of state revenue. But they repatriate most of their profits back home.
To really stoke tax revenues, in particular the big ticket earners such as value-added and income tax, domestic demand needs to grow.
BANKING MILLSTONE
The additional problem for Ireland is that a debt crunch rooted in a banking crisis can prove particularly intractable as on the hand bad debts swallow up state resources and on the other, the sector is in no shape to lend in a way that would foster a business and consumer recovery.
"The history of banking crises show that in coming out of a banking crisis, the economy tends to grow quite slowly," said Philip Lane, professor of international economics at Trinity College Dublin.
"There is a lot of genuine uncertainty there because Ireland has never gone through this before."
Ireland will likely have a new coalition government of the centre-right Fine Gael party and the centre-left Labour party after an election which could take place in February or March.
Fine Gael, the bigger party and the probable senior player in a new administration, had wanted to tap Ireland's 24 billion euro National Pensions Reserve Fund (NPRF) to fund capital projects to stimulate growth.
But under the terms of the bailout, Ireland will take 12.5 billion euros out of the NPRF, meant to address a future pensions time bomb, and funnel it into its banks.
With 10.7 billion euros already earmarked from the NPRF for previous bank capital injections, the rainy day fund is dry.
Some 35 billion euros of the bailout will go towards restructuring Ireland's banks, which will be shrunk and bulked up with capital to cover future loan losses.
With the management of Bank of Ireland and Allied Irish Banks focused on selling off blocks of loans and raising capital they are not expected to be much help in driving the local economy.
A survey of Irish businesses by Ernst & Young showed nearly two thirds said they were not confident the bailout package would improve bank liquidity or allow them greater access to credit in the near future.
More than half believed the four-year budget plan had the potential to damage the recovery.
