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Here's why the OECD thinks we need to cut €2 billion in the budget

The head of the Irish desk says our credibility is on the line.

Image: AP/Press Association Images

THE HEAD OF the OECD’s Irish desk has said the Government should stick to the planned €2 billion adjustment in this year’s budget.

David Haugh told TheJournal.ie that the pressure remained on Ireland to bring down its debt to GDP ratio, which is currently at over 120 per cent.

“The balance of risks is skewed towards sticking to the programme. Ireland’s debt level is still very high. With a debt level of over 120 per cent, it is still very vulnerable to economic shocks.”

He said that Ireland remains “on a good path, but there’s very little room for error.”

Ireland is also set to marginally miss its fiscal deficit target this year, which the OECD reckons will come in at 3.1 per cent, 0.1 per cent higher than the target prescribed in the bailout programme.

Fiscal credibility

Ireland risks undoing a lot of the good work done during the past few years if it does not stick to the €2 billion target, he argued.

“If you stand back and look at the metrics, the prudent thing to do is to stick to your plan. Delivering on your plan has gained you a lot of credibility in the markets.”

That record is something that is hard to build and very easy to blow out of the water.

He said that as an asset, the credibility could be very important when unavoidable negative shocks hit the market.

The economy can also bear the fiscal consolidation more easily if it is more healthy, Haugh argued.

Upside

He said that there was a good chance that investment and housing activity will pick up in 2014 and through into next year.

The question, according to Haugh, is whether an Irish economy that was “cut to the bone” will recover in a single burst or more smoothly.

“Ideally, smooth growth is preferable for the expansion.”

“The Irish economy has some strong fundamentals: the export sector, relatively flexible labour and product markets…it’s a good environment for doing business -and it is the envy of some of the more poorly performing European economies.”

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Jack Horgan-Jones

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