Irish economy set to shrink again

Government plans to slash spending and raise taxes will shrink the Irish economy for an unprecedented third year in 2010 but it should recover to grow 2 per cent in 2011, it was claimed yesterday.

Battling to convince investors that Dublin does not need a Greek-style bailout, Taoiseach Brian Cowen has pledged to squeeze out €15 billion in fiscal adjustments over the next four years to tackle the worst budget deficit in Europe.

Economists surveyed by Reuters said Cowen would succeed in getting the deficit close to an EU limit of 3 per cent of gross domestic product (GDP) by 2014 but the immediate impact would be a further shrinking of the former "Celtic Tiger" economy.

"While it is perverse to say that it is good news when the government is taking out nearly 10 per cent of GDP in fiscal consolidation measures, the reality is that regardless of outcomes, the action needs to be taken," said Brian Devine, economist with NCB Stockbrokers in Dublin.

"The bottom line for the period to 2014 is that the economy needs to undergo a serious adjustment following the credit-fuelled property boom of the previous decade.

"The sooner this adjustment occurs, the better footing the Irish economy will be on for the second half of this decade."