Next month, the government will unveil its much-anticipated four-year plan to reduce the annual budget deficit to the 3% required by the Stability and Growth Pact. The €15bn adjustment, confirmed by Taoiseach Brian Cowen last week, is expected to be tilted heavily towards cuts in next year's budget to appease bond markets and enable the country to borrow the billions it needs to survive.
It is also meant to impress EU commissioners such as Olli Rehn, who will be in Dublin next week to supervise the planning, and the ECB, which is still lending heavily to Irish financial institutions.
While taking 10% of GDP out of the gap between revenue and spending will get Ireland back in the good graces of the EU and its Frankfurt funders, its effect on the business environment in the country is less certain. Economists are expressing concerns that by imposing necessarily severe fiscal discipline on unsustainable public finances, the overall economy could take an even worse battering, jeopardising the chances of a much-hoped-for recovery.
Cowen admitted as much in the Dáil last week when he said: "While the degree of frontloading may dampen economic growth in 2011, it will give the necessary confidence to the international markets and secure our funding position."
The government has made its choice: borrowing in the bond markets trumps repairing our damaged economy in the short term.
NCB economist Brian Devine estimated that GDP growth next year would come in below 2% and only average 2.1% out to 2014, the period in which the budget consolidation must take place to meet EU standards. Recovery level growth, he wrote in a note to clients last week, was unlikely to return until the second half of the decade.
"While it is perverse to say that it is good news when the government is taking out nearly 10% of GDP in fiscal consolidation measures, the reality is that regardless of outcomes, the action needs to be taken," he said. "The problem in the meantime is that the measures could drive economic growth even lower than we expect in the period to 2014."
One of the big problems facing Ireland, and a key reason driving the dramatic fiscal adjustment, according to Dolmen head of research Oliver Gilvarry, is lower economic growth both at home and abroad, plus the high cost of debt for the Irish sovereign and its corporations.
Growth in the UK, one of Ireland's biggest trading partners, was an anaemic 0.8% in the third quarter – a drop from 1.2% in the second-quarter, but ahead of expectations. The US recovery appears to have stalled also, prompting calls for a new stimulus package from Congress or, more drastically, another round of money printing from the Federal Reserve. For an export-led recovery, Ireland needs the UK and the US to buy more of our products and services.
"International developments are crucial to Ireland's growth and fiscal prospects, said Davy economist Aidan Corcoran last week. " If UK demand continues to hold up, it will help to cushion the direct withdrawal of money from the economy that the budget will entail."
Better prospects abroad are almost a requirement for the government's plan to work. Finance minister Brian Lenihan has said the plan is predicated on average growth of 2.75% a year – nothing spectacular, but still lower than the consensus of analysts. The country is in something of a Catch 22: we need growth to make the budget adjustments work so we can borrow our way through the crisis, but our budget adjustments and borrowing are likely to have a dampening effect on economic activity.
"We still think that it will be a tall order for Ireland to meet the 2014 deadline, given the fragility of both the domestic and global economy," said Bloxham chief economist Alan McQuaid. "Ireland will have to generate economic growth if the budgetary target is to be met though there will be a better chance of this being achieved if tax increases are kept to a minimum."
Cowen and Lenihan have indicated more emphasis will be placed on spending cuts than tax rises, but the latter have not been ruled out.
With consumer demand still in a slump, according to retail sales figures released last Friday, less disposable income in the next three years means spending – and the domestic market – is likely to remain depressed.