The economy, as measured by gross domestic product, will expand 0.2 percent this year instead of 0.8 percent forecast in July, the Dublin-based central bank said today. It lowered its growth forecast for next year to 2.4 percent from 2.8 percent.

The government last week unveiled measures to inject extra cash into Anglo Irish Bank Corp. and other lenders, raising the cost of the its banking bailout to as much as 50 billion euros ($68 billion) and pushing the budget deficit to 32 percent of GDP this year. Concern that Ireland won’t be able to deal with the mounting fiscal burden without external aid pushed its borrowing costs to a record last month.

“Against the background of sharply increased concerns about fiscal sustainability, the main priority” is that the 2011 budget “credibly demonstrates the first step of a reprogrammed tighter fiscal plan,” the central bank said. This means a “larger adjustment” than the 3 billion euros in savings the government had previously planned.

‘Strike a Balance’

Finance Minister Brian Lenihan plans to publish a four-year plan next month to reassure investors that Ireland has a “credible” plan to cut its deficit to below the European Union limit of 3 percent of GDP in 2014. The Sunday Tribune newspaper reported yesterday that the 2011 budget could aim for savings of as much as 4.5 billion euros.

The government’s plan “seeks to strike a balance between the need to bring the public finances onto a sustainable footing and limiting the risk that a very rapid adjustment would affect the economy’s prospects for recovery,” the central bank said.

The yield spread between Irish 10-year debt and that of Germany, Europe’s benchmark, was at 406 basis points today after widening to a record 454 basis points on Sept. 29.

Irish GDP fell 1.2 percent in the second quarter as consumers cut spending and import growth outweighed an increase in exports. The economy has continued to show signs of weakness, with construction remaining in a recession in August and manufacturing contracting in September.

“The continuing weakness of investment remains a considerable drag on growth,” the central bank said. “The risks to this outlook are tilted to the downside.”