The Economic and Social Research Institute says the promissory note deal will cut the Government’s deficit by more than €1 billion in 2014.

However, the costs of the associated liquidation of the Irish Bank Resolution Corporation (IBRC) mean that it will increase spending this year.

Despite the growth in spending, the ESRI is also predicting that the Government will meet and probably exceed its target of keeping the deficit – the shortfall between revenue and spending – within 7.2 per cent of gross domestic product.

In February the Government swapped the promissory notes used to pay for the €30 billion recapitalisation of the Anglo Irish Bank and Irish Nationwide for long-term bonds, extending the repayment period and cutting the annual cost of servicing the debt.

More sustainable
In its first Quarterly Economic Commentary since the deal was announced, the ESRI says it is one of several factors that should help to improve the outlook for the State's public finances as it will ease its short-term funding requirements and help make the overall national debt more sustainable.

It adds that the cost of winding up IBRC, the entity that took over Anglo and Nationwide, and the interest that has already accrued on the promissory notes, will be “slightly more” than the €1.1 billion savings that will result from the deal.

However, it says the impact is expected to be more substantial in 2014 and in subsequent years, “reducing the general Government deficit by approximately €1 billion”.

The ESRI’s figures show that it expects Government spending to be €69.6 billion this year, up from €68.8 billion in 2012.

With revenues estimated to be €57.5 billion, the State will end up with a €12.1 billion deficit, or 7.2 per cent of GDP.

It forecasts that spending will fall to €67.8 billion in 2014, aided by the benefits of the promissory note deal, while revenues will grow to €59.8 billion, leaving a shortfall of €8 billion, or 4.6 per cent of GDP.

The institute says the forecast deficit for this year will actually beat the Government’s target of 7.5 per cent.

Similarly, it should also do slightly better than its 2014 target, which is 5.1 per cent.

The bailout deal between the State and the EU-IMF troika obliges the Government to meet those deficit targets.

While the State’s financial position is improving, the ESRI’s commentary, published today, recommends that it continue with its austerity policies.

“Planned consolidation measures should be introduced as much uncertainty remains for domestic and international growth,” the report, written by David Duffy and Kevin Timoney, warns.