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Ireland: Confident of a return to force

A floor has now been placed under the banking crisis, albeit at a very high cost to the public purse.

The bursting of the property bubble has had substantial implications for the Irish economy. Living standards have fallen back to 2004 levels, while transitory tax revenues–which had been used to finance increases in public expenditure–effectively dried up. In addition, Ireland has had to cope with the collapse of our domestic banking system, resulting in exposure to very large losses.

Notwithstanding the fact that Ireland has been tackling the impacts of the changed budgetary situation since mid-2008, market sentiment towards Ireland deteriorated in the autumn of 2010, on foot of rising public debt amid large annual deficits and public support for the banking system. Access to markets was effectively closed, necessitating financial support from our EU partners and the International Monetary Fund.

A new government took office in March of this year with a very strong mandate from the Irish people. The government is committed to reducing the fiscal deficit below 3% of GDP by 2015, in line with our European requirements. Moreover, we envisage running primary surpluses from 2014 onwards, helping to ensure that public debt moves onto a declining path by the mid-part of this decade.

The government is also committed to implementing additional structural reforms to boost the productive capacity of the economy, enhance labour market prospects and further ensure that the public finances and our overall debt burden remain on a sustainable path.

Through its policy measures, such as its Jobs Initiative, the government is implementing various reforms to address the deterioration in the labour market; crucially, this will be achieved in a fiscally neutral manner, and will help boost confidence and reduce precautionary savings.

A key focus of government policy is repairing the banking sector so that it is in a position to provide the credit necessary to support recovery. In broad terms, the approach is to recapitalise, restructure and deleverage viable institutions, and to facilitate the orderly winding down of unviable institutions. The recent Prudential Capital and Liquidity Assessment Reviews conducted by the Central Bank of Ireland have been well received by market participants, and there is a consensus that a floor has now been placed under the banking crisis, albeit at a very high cost to the public purse.

The recent macroeconomic data flow has been relatively encouraging, and GDP is expected to expand once again this year–the first time since 2007. While further fiscal consolidation and private sector balance-sheet repair will continue to restrain domestic demand, the exporting sectors continue to perform very well. This rebalancing reflects the significant improvements in cost competitiveness evident in recent years. This has resulted in the current account of the balance of payments moving into surplus, which is a key positive indicator in terms of overall medium-term prospects for the Irish economy.

The external funding programme has provided us with the breathing space to implement appropriate financial, fiscal and structural policies. The recent quarterly review concluded that policy implementation has been strong and that the targets have been met. As our policies pay dividends in the months and years ahead, we are confi dent of a return to market-based funding for both the sovereign and the banking sector by the end of the programme period in 2013.


References

OECD (2009), Economic Surveys: Ireland (next survey due late 2011)

OECD (2010), Better Regulation in Europe: Ireland

OECD (2010), Environmental Performance Review: Ireland 2010

Visit www.finance.gov.ie

For the views of other finance ministers from the OECD and partner countries on the economic challenges in 2011, see page 16 and our finance ministers’ roundtable in the inaugural edition of the OECD Yearbook 2011, now available online at www.oecdobserver.org/yearbook2011


©OECD Observer No 284, Q1 2011