Ireland's new government will stick to the fiscal targets laid down in an EU/IMF rescue package, a source familiar with the coalition deal agreed between the two main political parties said on Sunday.
Ireland's prime minister in-waiting Enda Kenny is under huge pressure to persuade European partners to cut the cost of the 85 billion euro ($119 billion) bailout and the coalition agreement, clinched after midnight, seems designed to curry favor with the fiscally conservative Germans.
Kenny's center-right Fine Gael party has persuaded junior partner, the center-left Labour party, to drop its demand that Ireland be given an extra year to get its budget deficit under control and to agree that the bulk of the adjustment should be achieved through spending cuts, said the source.
The new government will aim to shrink the shortfall from nearly 12 percent of Gross Domestic Product (GDP) currently to below an EU limit of 3 percent by 2015, a deadline already okayed by Brussels last year amid concerns spluttering growth would prevent Dublin meeting an original target date of 2014.
The source, who declined to be named because the two parties have yet to publish their programme for government, also said Fine Gael's finance spokesman, Michael Noonan, would be the administration's finance minister.
A spokesman for the Labour party declined to comment. No one from Fine Gael was immediately available to comment.
Analysts said investors would welcome Noonan's appointment given Fine Gael's pro-business, low-tax credentials and said the policy agreements between the two parties were in line with expectations.
I wouldn't see anything there that would scare the markets, scare Europe, scare the IMF or change anything very substantially going forward, said Eoin Fahy, chief economist, Kleinwort Benson Investors.
The fact that there will be a Fine Gael finance minister will be taken positively and should be because the ministry has a very large control over the small items, and not necessarily just the big picture macro stuff.
VERY SHORT HONEYMOON
Kenny, a former primary school teacher whose only previous government experience was as minister for tourism and trade, has less than three weeks to persuade European partners to relax the terms of their 40 billion euro plus worth of loans as part of a Europe-wide deal on the debt crisis at a summit on March 24-25.
Kenny fears the deal will bankrupt the former Celtic Tiger economy but his pleas got a cool response from fellow European center-right leaders at a summit in Helsinki last week, where he was told that there would be no free lunches.
His coalition agreement with Labour party leader Eamon Gilmore does however strike the right notes for Europe.
Kenny has secured a deal that will see two thirds of the fiscal adjustment come from cutbacks rather than the 50/50 split between spending cuts and tax increases favored by Labour, the source said.
There will be no new taxes on work and the government will try to sell non-strategic state assets to shore up its finances.
The two parties have compromised on job cuts in the public sector with some 25,000 positions set to be culled, roughly midway point between the 18,000 targeted by Labour and the 30,000 eyed by Fine Gael.
The fiscal deadline, the split between cutbacks and tax increases and the number of public sector jobs set for the chop all chime with the four-year austerity plan published by the outgoing government, and endorsed by the EU and the IMF, late last year.
The similarities with the policies of such an unpopular administration, which was roundly routed in the election for its handling of the economic crisis, were inevitable given the straitjacket imposed by the EU/IMF bailout but they will not prove popular with voters who were seeking change.
Labour party members, in particular, will be aggrieved that the leadership has given ground on job cuts and the fiscal timetable.
I suspect that when people see the reality of a programme for government that they will inevitably be disappointed, said Eoin O'Malley, a lecturer at Dublin City University.
You can be almost guaranteed that there will be a very, very short honeymoon period for the new government.
The coalition deal will be formally approved by the two parties later on Sunday. The new government will meet for the first time on Wednesday when parliament is recalled.
(Editing by Jon Loades-Carter)