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Lenihan warns of 10% unemployment next year
Sunday, December 14, 2008 By Pat Leahy, Political Editor
Unemployment is likely to rise to 10 per cent of the workforce next year, Brian Lenihan, the Minister for Finance, has warned, meaning it will have doubled in the space of a year.

The Minister also said that Ireland was ‘‘in clear and present danger’’ and that severe action would be needed early in the new year to cut public spending. Speaking to TV3’s Political Party programme on Friday, Lenihan said that the government was preparing a detailed plan which it would submit to the social partners.

The government would then take action to correct the countries finances, he said. This will mean a range of cutbacks early in the new year.

It has also emerged that the budget deficit - the difference between tax receipts and government spending - is now expected to rise towards 9 per cent of GDP. This would smash the Budget Day target of 6.5 per cent, and approach three times the EU limit.

A deficit of this size is unprecedented in the euro zone. Economists say that, even in the current climate, the government will have to reduce it sharply to avoid frightening the international investors who buy government bonds and hence facilitate borrowing.

Difficult international markets mean that governments are finding it difficult to raise funds at the moment. Last week a German government bond auction came close to failing, with barely enough funds committed by investors.

At anything approaching 9 per cent, the deficit would be much too large for the government to bring it down to the EU limit of 3 per cent by 2011 as it had promised, even with a programme of massive public spending cuts.

Lenihan’s admission on the deficit came during Dail questions last week, where he predicted that the economic contraction next year would amount to somewhere between 3 and 4 per cent.

He indicated that the decline in projected taxation revenues would push the deficit up from the Budget Day forecast of 6.5 per cent of GDP to 7.25 per cent. However, with the recession now expected to be much more severe next year, he suggested that ‘‘each 1 per cent deterioration in economic activity in 2009 beyond the contraction of 1 per cent already forecast would increase the general government deficit by approximately 0.5 per cent’’.

This means that he expects the deficit to grow to at least 8.75 per cent - a massive figure, even in today’s climate.

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