The government has published a stability program update with new projections for the economy and for the budgetary situation. Projections are provided for the general government balance under current policies as well as under a multi-year adjustment plan.
The government now project declines in GDP of 4% in 2009 and 0.9% in 2010 and unemployment is projected to average 9.2% in 2009 and 10.5% in 2010. Without changes in policy, the general government balance is projected to be in deficit to the tune of 11%-12% of GDP every year out to 2013.
The govenment has decided to address the fiscal situation gradually over the next five years. The report states: “Restoring sustainability to the public finances can only realistically involve a period of adjustment of up to five years. Taking action over a shorter period of time, given the scale of the emerging position, would impose substantial economic and social costs and would not be sensible or appropriate.”
An adjustment of €2 billion is proposed for this year, still leaving a budget deficit of 9.5%. Subsequent adjustments of €4 billion in 2010 and 2011, €3.5 billion in 2012 and €3 billion in 2013 will gradually reduce the deficit over time to 2.5% in 2013.
No details are provided as to how these adjustments will be made. Worth noting, however, is that the adjustments total €16.5 billion. Given that the total bill for public sector pay and pensions is currently about €20 billion, it should be clear that despite the regular media focus on public sector pay cuts, restoring fiscal balance will require many other adjustments.