Ireland's exchequer deficit, already the biggest in the euro zone, could double next year following the European Commission ruling that money injected into Anglo Irish Bank is not an investment and must be treated as spending.
The ruling by Eurostat, the commission statistical body, yesterday forced the Government retrospectively to revise up its 2009 deficit – the difference between what it spent and what it raised in tax in any one year – from €19.35 billion to €23.35 billion.
The difference is the €4 billion injected into Anglo Irish bank.
Government sources conceded last night that if the commission takes a similar view of the additional €18 billion earmarked for Anglo Irish Bank this year, then the deficit will be almost doubled in 2010 to nearly €40 billion, rather than reducing as planned.
Speaking this morning, Fine Gael enterprise spokesman Leo Varadkar said if the money is counted as part of spending, that would affect the deficit.
"If the Government is going to put €2 billion into Anglo and Nationwide this year, in order to stick to their budget targets to bring the deficit down to 3 per cent by 2014 - the target they've agreed and committed to with the European Union - they're going to need to take €5 billion out in the forthcoming budget and not €3 billion. And that's the crucial point," he told RTÉ's Morning Ireland.
"Is the Government going to stick to its target?" Mr Varadkar asked. "And, if so, how are they going to take €5 billion out of the economy in the next budget?"
Speaking on the same programme, Minister for Tourism Mary Hanafin said the Irish economy is "no worse off" this morning than it was yesterday because the figures relate to last year. "It was a technical readjustment but we haven't had to borrow any extra money, we haven't had to make any extra repayments," she said.
"The deficit as announced yesterday for last year is not actually carried forward to today. So, we are now starting again at 11.8 per cent because it was added to the figures and then taken off for this year", Ms Hanafin said. "This hasn't affected in anyway our plan ... to reduce the Government deficit."
She said if the promisory note to Irish Nationwide is treated in the same way as the investment in Anglo, the figures would be added this year and removed again next year. "It's a strange accounting arrangement - it's like putting it in one column of a ledger rather than in the other. So it won't actually affect our target of reducing our deficit by 2014," she said.
"The underlying figures are still the same as they were at 11.8 per cent. The deficit is only one element in looking to see how strong the economy is. The markets haven't been affected, our bonds haven't been affected and I think the confidence that the international markets and indeed the regulator and the governor of the Central Bank have in the Government plan is still as solid as it was", she added.
A Government spokesman said last night that the situation will not be clear until the middle of the year, when the commission is due to pass judgement on the Anglo Irish Bank restructuring plan.
If the commission takes the view that there will be no return to the State on all or part of the €18 billion, then it must be treated as Government spending. If a similar view is taken of the €2.7 billion that is to be put into the Irish Nationwide Building society, then the position will deteriorate even further.
Last month, the Government injected €8.3 billion into Anglo Irish Bank bank and flagged a further injection of €10 billion to allow it absorb losses on loans going to the National Assent Management Agency.
The Government deficit is just one of a number of technical measures of economic performance. But the deficit as a percentage of gross domestic product – the monetary value of the goods and services produced by the economy – is the key measure used by the European Commission to monitor the financial performance of member states.
Ireland is committed to reducing its deficit-to-GDP ratio from the current unsustainable levels to the target level of 3 per cent by by 2014.
It is currently at 14.3 per cent and would balloon to well over 20 per cent in 2010 if the full cost of recapitalising Anglo Irish Bank has to be reflected. However, it would fall back by a similar amount in 2011.
A European Commission official said the rise in the Irish deficit may ultimately mean that Ireland takes "longer" to bring the deficit below the EU limit of 3 per cent or moves "faster" to achieve the target by the 2014 deadline.
However, Minister for Finance Brian Lenihan said there was no change in the Government's deficit plan. "This is a once-off impact, and will not affect the Government's stated budgetary aim of reducing the deficit to below 3 per cent of GDP by 2014," he said. "There is no additional borrowing associated with this technical reclassification."
But Fine Gael deputy leader and finance spokesman Richard Bruton took a different view, saying the impact of the decision on next year's budget would be very serious. "It means that if the Government is to meet its 3 per cent budget deficit figure by 2014, as agreed with the European Commission, it will have to find significant additional savings," he said.
Labour deputy leader and finance spokeswoman Joan Burton said the Eurostat decision confirmed what the Government and Mr Lenihan had sought to conceal. "Consistently during Dáil debates, the Minister tried to magic away the €4billion in taxpayers' money pumped into Anglo. Now Eurostat says differently, and corrects the Government's calculations."
The Minister rejected this accusation. "That is a political charge, unhelpful to the economy and above all else incorrect," Mr Lenihan said.
His spokesman said the change flowed from submissions made by the Government itself. “The Department of Finance informed Eurostat of how to treat the payments and Eurostat agreed. It wasn’t that Eurostat refined or changed them.”
