Irish Premier Admits Cuts Will Hit Growth

By QUENTIN FOTTRELL And AINSLEY THOMSON

DUBLIN—Ireland's embattled Prime Minister Brian Cowen admitted Wednesday that accelerating €15 billion ($20.78 billion) in planned budget cuts will damp economic growth, but warned the country runs the risk of "not being able to borrow at all" if the steps aren't taken.

Ireland's reputation has taken a battering on international markets amid doubts about its ability to bring its deficit, the highest in Europe, back under control. Record-high borrowing costs have forced the government to cancel the two remaining bond auctions planned this year.

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Irish Prime Minister Brian Cowen

Late Tuesday, the government doubled the amount of the budget cuts it intends to make between 2011 and 2014, from €7.5 billion to €15 billion. It indicated a big part of that would come next year but didn't say exactly how much.

"It is the government's judgment that 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," Mr. Cowen said in a speech to the Irish parliament. "We must recognize that even with the proposed adjustment of €15 billion we still intend to borrow tens of billions of euros between now and 2015. We simply cannot afford to increase borrowing further. If we try we would run a very real risk of not being able to borrow at all."

Mr. Cowen's right-of-center coalition government faces a difficult balancing act of cutting spending and increasing tax revenue without further damaging consumer confidence or economic growth, or becoming embroiled in a prolonged battle with public-sector unions.

The government blames the new spending cuts on lower-than-expected economic growth and the benign international economic backdrop. It expects annual economic growth for Ireland to average 2.75% over four years.

The European Commission, the European Union's executive arm, wants Ireland to bring its deficit—expected to reach 32% of gross domestic product this year—back under the EU limit of 3% of GDP by 2014.

The Irish Congress of Trade Unions umbrella group has said that the 2014 target should be extended to 2017. A union spokesman expressed concern that frontloading cuts would lead a "lost decade," using the term for a 10-year economic decline.

Goodbody Stockbrokers said that if Ireland targeted a ratio of one-quarter tax rises to three-quarters spending cuts, similar to that in the U.K., more than €11 billion in cuts would be required. "We would have doubts around whether this can be done, while still honoring the agreements made with unions and public-sector employees on maintaining current pay levels and an absence of compulsory redundancies," Goodbody's chief economist Dermot O'Leary said.

The government has said no department will be spared in the austerity drive. "We would also have concerns around the deflationary impact of a consolidation package amounting to close to 10% of GDP over a four-year period, given the current state of the economy," Mr. O'Leary added.

Write to Quentin Fottrell at quentin.fottrell@dowjones.com and Ainsley Thomson at ainsley.thomson@dowjones.com