The Irish government detailed the toughest budget on record yesterday (7 December), targeting €6bn in spending cuts and tax hikes and warning passage was crucial to avert a deeper crisis and free up EU and IMF rescue funds.
The EU approved an 85-billion-euro rescue for Ireland on 28 November and outlined a permanent system to resolve Europe's debt crisis (EurActiv 29/11/10).
Ireland's borrowing costs had shot to record highs amid concern about a deficit that was set to hit 32% of gross domestic product this year and growing borrowing costs.
In a speech to parliament, Irish Finance Minister Brian Lenihan sketched out austerity measures for 2011 including cuts to child benefit and public sector pensions, but stuck with growth forecasts that some economists - and even the European Commission - believe are too optimistic.
Parliament passed the first in a series of votes on the budget yesterday (7 December), suggesting that enough of the budget is likely to pass to release bailout funds. The budget's success had looked in doubt when independent politicians, on whom the government depends for support, said they might vote against it.
Shortly after the first votes were passed, the IMF's board scheduled a meeting on Friday to approve its 22.5 billion euro loan to Ireland.
The risk premiums investors demand to hold Irish 10-year bonds instead of German benchmarks fell on Tuesday to their lowest levels in a month, in anticipation that the budget would be approved.
A burst property bubble has transformed Ireland from one of Europe's brightest economic stars to a country that has been forced to seek an 85-billion-euro bailout from the IMF and the EU to cover its borrowing costs and shore up its banks.
Puppet government
The bailout, the second in the euro zone after Greece was rescued in May, has stirred outrage in the humbled former 'Celtic Tiger'. Opposition parties slammed the government for mismanaging the economy and sacrificing Irish sovereignty.
"This budget is the budget of a puppet government who are doing what they have been told to do by the IMF, the EU Commission and the European Central Bank," said Michael Noonan, finance spokesman for the opposition centre-right Fine Gael party and a possible future finance minister.
Once all the resolutions underpinning the budget have passed early next year, Prime Minister Brian Cowen - the most unpopular leader in recent Irish history - has promised to call an election he is widely expected to lose.
That means a new government, most likely a coalition of Fine Gael and centre-left Labour, will have to oversee the budget cuts.
Both opposition parties have said they will re-negotiate the terms of the bailout package agreed late last month, although in practice they will have little room for manoeuvre, having agreed to the broad targets of the rescue plan.
Small EU states should form alliance
Noonan also stressed that Ireland needs to form alliances with other small states in the European Union to promote their interests within the 27-nation bloc.
Ireland needed to revive a tradition of informal pacts with smaller countries such as the Netherlands, Belgium and Luxembourg, particularly during the current financial crisis, he explained.
Noonan said it was "disgraceful" that the government had not sent a minister to represent Ireland to a meeting of European finance ministers in Brussels when proposals for joint eurozone bonds were being floated. "It's the most far-reaching proposal and it could solve an awful lot of our problems if the euro bond is accepted," he declared.
Social welfare cuts
The 2011 budget is the toughest in a four-year austerity plan that aims to save 15 billion euros - nearly 10% of annual economic output - and get the worst deficit in the region back within EU limits by 2014.
Cowen will push through some four billion euros in spending cuts next year, with social welfare benefits, public pensions and capital projects all set for the chop.
"I'm afraid for the future, I'm afraid for the country and everyone around me," said Maeve, 62, a retired lecturer who broke into tears when talking about economic hardship at the Moore Street market in central Dublin.
Tax adjustments will make up another two billion euros with roughly half of the additional revenues coming from lowering income tax bands and tax credit changes, allowing the government to target the 45% of workers, on lower incomes, who did not previously pay income tax.
All property-based tax relief is due to be eliminated by 2014, drawing a line under controversial policies that helped fuel the property bubble and prompted accusations of a cosy relationship between the government and real-estate tycoons.
Tax breaks, low interest rates and loose lending policies fuelled a development binge that saw housing estates, shopping centres and hotels spring up across the country. Now many stand idle or half-built.
At the height of the boom property prices in Dublin rivalled those in Manhattan and Moscow, and thousands of Irish were millionaires on paper. The surge in personal wealth created a champagne lifestyle where helicopters were a favoured mode of transport and many ordinary citizens splurged on second homes.
Risk of downturn
Some economists have warned that the budget measures risk tipping Ireland into a prolonged downturn that would make its debt targets even harder to achieve.
"Ireland will not be a pretty place in 2011," said Jim Power, chief economist at financial services firm Friends First.
But Lenihan retained his view that gross domestic product (GDP) would expand by 1.7% next year, nearly double the European Commission's forecast of 0.9%. The government is forecasting growth of 3.2% in 2012, 3% in 2013 and 2.8% in 2014.
Danny McCoy, head of the Irish Business and Employers Confederation, said he saw little in the budget to help job creation or restore economic competitiveness.
(EurActiv with Reuters.)
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