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Deficit must be tackled quickly, Honohan warns

“Explicit reprogramming of the budgetary profile for the coming years is clearly necessary soon if debt dynamics are to be convincingly convergent.” No, we don’t know what that means either.

THE GOVERNOR OF THE Central Bank, Patrick Honohan, has warned that the government needs to cut the country’s budget deficit at a faster pace to bolster investor confidence, and that further cuts in spending or tax changes may be needed to ensure the government meets its targets.

In a speech this morning, Honohan called for “more clarity” on the government’s budget plans, before adding:

Some explicit reprogramming of the budgetary profile for the coming years is clearly necessary soon if debt dynamics are to be convincingly convergent.

Honohan, who is a member of the European Central Bank’s Governing Council, also said that costs related to Ireland’s banking crisis remain “manageable”, Bloomberg adds.

An assessment of the Anglo rescue cost, including both base capital and stress calculations, will help “narrow the range” of estimates of the cost of the Irish banking crisis on the country’s finances, he added, insisting that the final cost will be less than the figures “touted around”.

Recognizing that losses may exceed the base assessment over time, by setting out a stress case, we aim to provide as much certainty as is reasonably possible as to the potential exposure presented by Anglo under a severe hypothetical stress scenario in the runoff of its book.

On top of high yields on government bonds and the cost of funding the bank bailout,  Honohan said developments in the real economy and falling prices are making it more difficult for the government to meet its budget targets.

He continued that, as in the 1980s, the government’s borrowing costs were high because investors feared a worse outcome than was likely to occur.

It’s important now to reset the fiscal path to ensure a virtuous cycle of lower borrowing rates contributing to even faster fiscal adjustment.

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Jennifer O'Connell

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