Ireland to Spare No One in Austerity Drive


Ireland's deeply unpopular government will unveil a record austerity budget on Tuesday, inflicting more pain on voters to bring down a soaring deficit and win quick access to emergency loans from the EU and IMF.

Prime Minister Brian Cowen, who has a razor-thin majority, is expected to get his fiscal plan through parliament, averting the risk of a snap election that would plunge the country into an even deeper crisis and compound contagion in the euro zone.

Continue Reading Below

But the 2011 budget, which will squeeze 6 billion euros ($8 billion) out of an economy still smarting from a prolonged recession, marks the beginning of the end for his government.

Cowen, the most unpopular leader in recent Irish history, has promised to call an election once the legislation underpinning the budget is passed, likely to be early next year.

His Fianna Fail party is set for a record drubbing and a coalition of the center-right Fine Gael and the center-left Labour party is expected to take over, possibly as soon as the first quarter.

Both parties have said they will re-negotiate the terms of the 85 billion euro IMF/EU bailout package agreed late last month. But in practice the opposition will have little room for maneuver, having agreed to the broad targets of the rescue plan.


The 2011 budget is the toughest in a four-year austerity plan that aims to save 15 billion euros -- nearly 10 percent of the country's annual economic output -- and get the worst budget deficit in the region back within EU limits by 2015 at the latest.

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 don't want to think about it," said John-Joe Feeney, a 41-year-old out of work carpenter in Dublin's poor inner city.

"I just know they (the government) are going to hurt the people who have nothing, like me, my wife and kids and leave the fat cats alone. It's not worth thinking about."

Tax adjustments will make up another two billion euros with roughly half of the additional revenues coming from lowering income tax bands and tweaking tax credits, allowing the government to target the 45% of Irish adults, on lower incomes, who did not previously pay income tax.

Some economists have warned that such vicious cutbacks, on the back of two years of austerity, risk tipping Ireland into a prolonged downturn that makes its debt targets even harder to achieve.

"With such a figure (6 billion euros) being taken out of the economy, it is hard to see domestic demand picking up anytime soon," said Alan McQuaid, chief economist at stockbroker Bloxham.

Michael Lowry, an independent MP who decided on Monday to support the government's plan, said it was all about the "distribution of pain."

Lowry's thumbs up and the expected support of another independent MP mean that Cowen will get the controversial measures through parliament despite having a majority of just two.

Brian Lenihan, ranked by the Financial Times as the worst finance minister in Europe earlier this week, will unveil the plan in parliament at 1545 GMT and the lower chamber will vote on changes to excise duties and sales taxes in the evening.

A separate vote on social welfare measures is due on Thursday and a third on general finance steps will take place in the first quarter of 2011.

A failed vote on Tuesday or Thursday would trigger a general election and prevent the flow of funds from the EU and IMF until a new administration was in place.

Ireland's budget deficit is set to blow out to a jaw-dropping 32% of gross domestic product (GDP) this year due to the one-off inclusion of a 30 billion euro-plus bill for shoring up its banks.

Years of reckless property lending by Irish banks tipped the country into a financial abyss and fears over future loan losses provoked the current crisis.

Some 35 billion euros of the bailout package will be channeled to lenders, meaning the eventual bill for cleaning them up could top 80 billion euros.

Dublin has promised to recapitalize, restructure and shrink its banks as a condition of the bailout but uncertainty over whether the sector will throw up future nasty surprises will continue to weigh regardless of the passage of the budget.

"You can solve the fiscal problem but the banks are still, by far, the biggest issue," said Eoin Fahy, chief economist with Kleinwort Benson Investors. "You still have this unknown of the banks."