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Irish fiscal watchdog warns government may miss deficit target

John McHale has warned the Irish government that there is no margin for error after easing up on austerity measures

Ireland no longer has any margin for error in its bid to meet the European Union’s budget deficit limit by 2015 and there is a one-in-two chance it will fail, the country’s independent fiscal watchdog said on Friday.

The government, which met all its major targets under its EU-Internatiomal Monetary Fund bailout, has said it is on course to reduce its deficit to 2.9 percent of gross domestic product by 2015, just below the EU limit of 3 percent and down from 7.3 percent this year.

But its decision last month to reduce the amount of austerity in its 2014 budget by 20 percent and a weakening growth outlook means it is very vulnerable to a downturn in growth or a fall in the tax take, the Fiscal Advisory Council said.

“The margin of safety has essentially been removed,” Chairman John McHale told reporters, presenting the council’s quarterly fiscal assessment report.

The council, set up under the 2010 bailout, has new powers to scrutinise and endorse budget forecasts but much of its advice, such as a call for more austerity to put Ireland’s debt on a more sustainable footing, has fallen on deaf ears.

It advised the government to stick with targeted cuts of 3.1 billion euros ($4.2 billion) before the figure was reduced to 2.5 billion. It also said it would have favoured Ireland exiting its EU/IMF bailout with a precautionary credit line.

Dublin opted to make a clean break from the 85 billion euro bailout last week but noting the fragile external environment, the council said a backup credit line would have provided valuable added protection against any fresh funding pressures.

The council approved government forecasts in Budget 2014 as appropriate last month, though it cautioned that they relied heavily on a pick up in economic growth.

Based on an analysis of historic growth forecast errors, the council said the probability of Ireland breaching the EU target of a 3 per cent deficit ceiling in 2015 has risen from an estimated 1-in-3 to an estimated 1-in-2.

It added on Friday that recent signs of growth momentum should continue into next year, but that the risks to the government’s forecast for gross domestic product (GDP) growth of 2 percent remain tilted to the downside.

“Substantial progress has been made, but very substantial risks remain,” McHale said.

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