Government spending cuts aimed at reducing the budget deficit may end up sacrificing long-term economic growth, according to Michael O’Sullivan, head of asset allocation at Credit Suisse Private Banking.

“Arguably the Irish bond market is being saved at the expense of Irish society,” O’Sullivan, 38, author of a 2006 book on Ireland’s economy, told Bloomberg. “By cutting spending you lower the trend line of growth and store up bigger fiscal problems down the line.”

Finance Minister Brian Lenihan has said he will trim about €4bn from spending next year to stop the deficit widening to beyond 12 percent of gross domestic product, or four times the limit for countries with the euro zone.

The goverment forecats that tax receipts will plunge about 20pc this year as the economy, once Europe’s fastest growing, shrinks at a record pace.

“Cutting deficits is a limited strategy because in the longer term you need growth to kick in,” said O’Sullivan. “The issue is: where is your growth going to come from?”

Lenihan plans to reduce the deficit to 3pc of GDP by 2014 to meet a European Commission deadline, and is seeking €1.3bn in pay cuts from public sector workers, as well as reductions in welfare, health and capital spending.

Irish-born O’Sullivan, author of “Ireland and the Global Question,” published by Cork University Press, said that before the boom, it was still an “adolescent economy, given the decades or even centuries of underperformance.”

The difference in yield, or spread, between 10-year Irish bonds and equivalent German bunds was at 158 basis points yesterday, compared with 284 basis points in March, the highest in at least a decade.

“The boom was a once-in-a-lifetime economic event,” said O’Sullivan, who plans to publish a second book next year. “If you step back and look at other economies where that has happened, it almost invariably gets out of control.”

- Dara Doyle and Ian Guider

© Bloomberg

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