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Ireland signals bigger cut in 2012 budget deficit

By Padraic Halpin

DUBLIN (Reuters) - Ireland's finance minister signaled on Monday that the government would make a larger budgetary adjustment of 4 billion euros ($5.8 billion) in 2012 despite being confident of meeting this year's fiscal goals under an EU-IMF bailout.

The government had pledged to cut spending and increase taxes in 2012 to the tune of 3.6 billion euros in the latest in a long line of austerity plans as it strives to get its budget deficit to under 3 percent of gross domestic product (GDP) by 2015.

However, Michael Noonan said for the first time that the figure could rise to around 4 billion euros when he unveils his first budget as finance minister in December.

"Looking forward to next year we have a correction of about 4 billion -- 3.6 is the EU/IMF figure -- to make and that's going to be difficult," Michael Noonan told national broadcaster RTE.

"The job isn't even half done yet. Next year, even though the overall figures are about two-thirds of this year's adjustment, it may be more difficult to achieve ... A lot of the low hanging fruit has been picked."

Noonan's comments came after half-year figures for tax returns and government spending showed that Dublin was so far meeting the demands of its international creditors despite falling consumer demand hitting spending-related tax receipts.

Ireland is aiming to squeeze its deficit, currently the worst in the euro zone, to 10 percent of GDP this year from nearly 12 percent in 2010.

On a headline basis, the budget deficit was 10.8 billion euros in the first half, compared with a shortfall of 8.89 billion euros a year ago.

Stripping out the 3 billion euros funneled to defunct lenders Anglo Irish Bank and Irish Nationwide in January, the budget deficit in the first half was 7.8 billion euros, a reduction of 1 billion euros from the previous year.

"Although there is some weakness in certain tax-heads, the budget day target for tax revenue in 2011 of 34.9 billion euros remains achievable," Noonan said, adding that he expected an EU/IMF team to say Dublin was achieving its targets in a review later this month.

"All is going well so far and if there weren't difficulties in Greece, we'd be sailing into calmer waters, but of course there is always the overhang from Greece."

DOWNSIDE RISK

Tax revenues stood at 15.3 billion euros, 0.7 percent below target, due to weaknesses in sales tax returns and corporate tax returns. Crucially, income tax, the most important tax bracket, came in on target.

Economists said there were still downside risks to the government's full-year targets, and the weakness in spending-related taxes meant the government, elected to office in February, would have to make some unpalatable budgetary calls.

"I think there is downside risk on the spending-related tax receipts because core retail sales have fallen for four consecutive months," said Dan McLaughlin, chief economist with Bank of Ireland.

"It looks as if consumer spending will fall 2.5 percent in volume terms this year. I would say that it is considerably lower than they envisaged at the start of the year."

A Reuters poll released earlier on Monday showed that the outlook for retail sales has worsened for 2011.

Prime Minister Enda Kenny has ruled out further increases in income tax or cuts to social welfare, narrowing the country's options for next year's budget.

"It's good news that it's on target, but these figures are still telling you of the size of the task that lies ahead in terms of reductions to public spending," said Austin Hughes, chief economist with KBC Bank.

"It's difficult to see why the consumer would suddenly come to the rescue."

(Additional reporting by Carmel Crimmins)

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