DUBLIN (Reuters) - Ireland's international lenders have given it the green light to ease up on austerity in its 2014 budget, the government said on Tuesday, easing pressure on an economy officials admitted would grow far slower than previously thought.
Ireland has been the euro zone's bailout success story and is on track to exit its international aid programme later this year, while other bailed-out countries struggle to hit their deficit targets.
But the economy remains extremely fragile, with the finance ministry on Tuesday slashing its 2013 growth forecast to 0.2 percent from an estimate of 1.3 percent made six months ago on shrinking domestic demand and exports.
Finance Minister Michael Noonan said the package of spending cuts and tax hikes in next week's budget would fall to around 2.5 billion euros (2.1 billion pounds) from 3.1 billion originally agreed under the bailout.
Energy Minister Pat Rabbitte later said the move was a victory for the government that had been "approved by the troika" in weekend discussions in Brussels, a reference to Ireland's three lenders, The International Monetary Fund, European Union and European Central Bank.
"There will be 600 million euros less hardship visited on a public that are already suffering for too long," Rabbitte said.
Asked if the European Commission had given its approval, a spokesman said it had "taken note" of Noonan's comments on the budget.
The commission's preliminary assessment was that the draft budget "provides a sound basis for taking forward the necessary fiscal consolidation in Ireland," said the spokesman for Olli Rehn, the EU commissioner in charge of economic affairs.
Ireland has for months argued that it could cut less than the 3.1 billion and still cut its 2014 deficit below the 5.1 percent of gross domestic product demanded by the troika, in part due to slack afforded by a bank debt deal struck with the European Central Bank earlier this year.
Some IMF and ECB officials had called on Ireland to stick to the 3.1 billion figure, arguing the money should be held to cushion the weak Irish economy against any shocks ahead of an expected exit from the bailout later this year.
GROWTH FORECAST CUT
But weakness in the domestic economy and in key export partners have increased Ireland's argument for easing up.
The government's forecast of 0.2 percent GDP growth in 2013 is ahead of a Reuters poll of economists last week that forecast zero growth, but below a recent forecast by the International Monetary Fund of 0.6 percent.
The government forecast growth of 1.8 percent for 2014, down from a forecast of 2.4 percent six months ago and a forecast of 1.7 percent in the Reuters poll.
"The real risk to the Irish public finances is the weakness of economic activity rather than the commitment to do painful things in the public finances," said Austin Hughes, chief economist at KBC Ireland.
"A budget that errs on the side of supporting growth, rather than being more draconian, is probably the right balance to strike and it seems entirely sensible to me to do less damage to the fragile economy.
The easier budget may ease pressure on the ruling coalition. The junior partner, the left-leaning Labour Party, has suffered in opinion polls with its ministers overseeing large cuts to social welfare and education budgets.
(Additional reporting by John O'Donnell in Brussels; Editing by Ron Askew)