Fianna Fáil is backing the Labour position on the forthcoming budget, calling for a significant reduction in the €3.1 billion adjustment favoured by the troika and Taoiseach Enda Kenny.

Tánaiste Eamon Gilmore told The Irish Times last month he did not accept the need for savings of €3.1 billion but his position was immediately rejected by Mr Kenny who insisted the target stood.

Now Fianna Fáil finance spokesman Michael McGrath has come out strongly in favour of a significantly easier budget, saying the troika should not be allowed to “dictate the scale of the adjustment” in October.

Writing in today's Irish Times, Mr McGrath says that, since July 2008, "a mammoth fiscal adjustment of about €28 billion has been implemented". He says three-quarters of the fiscal adjustment achieved so far was as a result of budgets introduced by the late Brian Lenihan as minister for finance: "In fact, were it not for the decisions Brian initiated between July 2008 and December 2010, our deficit would now be off the Richter scale."

'Troika cannot dictate'
Mr McGrath says Fianna Fáil is fully committed to bringing the deficit down to less than 3 per cent of gross domestic product by the end of 2015 but, due to the restructuring of the promissory notes, there is now limited scope to moderate the correction of the finances, perhaps by up to €1 billion over the next two years.

“October’s budget must ensure that Ireland’s general government deficit in 2014 does not exceed 5.1 per cent of GDP. That is the bottom line. Taking that as a given, as far as I am concerned, the troika cannot dictate the scale of the adjustment . . .”

Mr McGrath says an adjustment of €3.1 billion in October’s budget would yield a deficit figure of 4.3 per cent in 2014, well below the 5.1 per cent limit.He said reducing the adjustment by several hundred million euro might not make an enormous difference. “However, for our austerity-weary citizens affected by the extra spending cuts and tax increases that would otherwise be introduced, it could make all the difference indeed.”

Mr McGrath’s position appears identical to that of Mr Gilmore who recently rejected a call from head of the euro zone rescue fund Klaus Regling for strict adherence to the €3.1 billion adjustment.

Bailout exit jeopardised
However, Mr Kenny responded by saying the country cannot afford to take the foot off the pedal at this stage. "Failure to follow through on all the hard work and sacrifices of the Irish people now, so close to the bailout exit, jeopardises everything we have all worked for," he said when questioned about Mr Gilmore's views.

Separately, the former IMF chief of mission to Ireland, Ashoka Mody, in a paper on the European debt crisis, has repeated claims that austerity is not working for Europe .

Mr Mody argues that euro area banks should tackle mortgages in negative equity – where the loan is worth more than the home – by swapping them for new debt linked to the current market price.

Instead of accumulating arrears based on the original loan, he suggests the banks could create a mortgage aligned to the market price.

“For example,” he says, “the starting burden under the new contract could be based on 80 per cent of the current market value. If the market price rises, there could be scope for the bank to share some of the upside.” Mr Mody has courted controversy by arguing the Republic should row back on austerity as it is a potentially self-defeating policy.