Pain ranges widely as Irish unveil cuts, tax rises

Irish Prime Minister Brian Cowen outlines austerity measures Wednesday. “This will ask a lot of all of our people,” he said.
Irish Prime Minister Brian Cowen outlines austerity measures Wednesday. “This will ask a lot of all of our people,” he said.

— Ireland’s government said Wednesday that it will cut spending and raise taxes over the next four years as talks on a multibillion-dollar bailout of the country near conclusion.

The budget measures call for the government to cut $13.3 billion from spending and raise $6.7 billion in extra taxes from 2011 to 2014. It axes thousands of state jobs, welfare benefits and pension payments while raising university fees and taxes, forcing Prime Minister Brian Cowen to concede it will hurt the living standard of everyone in the nation.

“This will ask a lot of all of our people,” Cowen conceded as he unveiled the cuts. But, he said, the government needed to have a spending plan that is “affordable for the money that taxpayers are able to provide in the current circumstances.”

The plan is a requirement for Ireland’s application for an estimated $115 billion bailoutfrom the European Union and the International Monetary Fund.

“We have to deliver on this stuff and at least set out some kind of road map that we intend to follow,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “It won’t solve the eurozone problems.”

Analysts said they also fear that the bailout will be too little to save Ireland from an eventual default.

Bank shares plummeted for a third straight day on the Irish Stock Exchange in growing expectation that investors would be wiped out if the government is forced to seize total control of the country’s two dominant banks, Allied Irish and Bank of Ireland.

“The government is completely in denial about the amount of money they’ll have to borrow,” said Constantin Gurdgiev, a finance lecturer at Trinity College Dublin and an economics adviser to IBM in Europe.

Ireland is still negotiating the terms of the bailout with European Central Bank and IMF experts. It hopes the tough budgetary medicine will permit its 2014 deficit to fall to 3 percent of gross domestic product, the limit for the 16 nations that use the euro currency.

While most eurozone members are violating that rule, Ireland’s deficit this year is forecast to reach 32 percent, a modern European record, fueled by exceptional costs from Ireland’s bank-bailout effort.

“Today is about Ireland putting its best foot forward, Ireland saying: Yes, here is what we’re prepared to do as a government and a people to put right what has to be put right, and to give ourselves prospects and prosperity again,” said Cowen, who is widely expected to resign or be forced from office within weeks.

Business leaders welcomed the package as brutal but unavoidable given that Ireland is all but frozen out of normal lending markets and its banks are running out of cash.

But outside the guarded iron gates of Cowen’s office, about 100 activists denounced the government and the IMF, and Irish unions planned to march Saturday against the cuts.

Ireland’s 140-page National Recovery Plan proposes to introduce property and water taxes, raise the sales tax from its current rate of 21 percent to 22 percent in 2013 and to 23 percent in 2014, and cut the minimum wage to $10.20.

Ireland’s bloated civil service will be particularly hard hit - seeing cuts of about $1.6 billion and 24,750 state jobs.

Income tax brackets will be widened so that more lowerpaid workers pay taxes, and middle-class workers will see annual taxes rise more than $4,000. A raft of welfare payments will be gradually reduced.

Young and old alike face higher bills and less income. University fees will rise, as will the charges on state funded pensions. But monthly pension payouts will fall up to 12 percent.

Ireland’s legendary tax-free existence for authors, musicians and artists is facing a major cutback so that only the first $53,000 of income will avoid tax.

“Those who can pay the most will pay most, but no group can be sheltered,” the government said in the report. “Postponing these measures will lead to great burdens in the future for those who can bear them.”

Left untouched, to the irritation of other EU nations, is Ireland’s exceptionally low 12.5 percent tax rate on business profits. That rate is less than half the EU average and has helped to attract about 1,000 high-tech multinationals to Ireland, far more proportionally than any other European country.

France, Germany, Austria and Britain all have called for Ireland to raise that rate. They argue it amounts to unfair competition at a time when other EU members will have to raise their own debt-fueled borrowings to loan money to Ireland.

But Finance Minister BrianLenihan told reporters that Ireland would be shooting itself in the foot if it did anything to scare off foreign investment. The foreign companies, including 600 U.S. businesses such as Microsoft and Google, generate nearly 20 percent of Ireland’s GDP.

Lenihan challenged opposition leaders, who have yet to confirm they will support the government’s 2011 budget when it is introduced Dec. 7, to accept the plan as the only possible way forward regardless of expected early elections next year.

Ireland’s finance chief said the four-year plan “has to bethe basis for any sensible proposals for the next general election. Anything else that’s put forward is nonsense.”

Six months after Greece received a $140 billion bailout, calming investor panic in Ireland is now considered pivotal to restoring calm in other economically troubled nations in the region. Without confidence that Ireland’s situation will not deteriorate further, analysts say it might be impossible to prevent a broader debt crisis in the region that could destabilize the euro.

Portugal remained the most immediate concern, with analysts warning over its failure to meet targets to reduce government overspending. But givenPortugal’s tiny economy, the more important threat continued to be Spain - the fourthlargest economy among the 16 nations that share the euro as their currency.

Information for this article was contributed by Shawn Pogatchnik of The Associated Press, Dara Doyle and Joe Brennan of Bloomberg News and Anthony Faiola of The Washington Post.

Front Section, Pages 5 on 11/25/2010

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