Ireland Unveils Budget Cut Plan

Ireland Unveils Budget Cut Plan

Ireland's fractured coalition government Wednesday outlined an ambitious four-year plan of EUR15 billion in spending reductions and tax measures, but vowed to keep its 12.5% corporation tax rate. "Today is about Ireland putting its best foot forward--Ireland saying yes, here's what we're prepared to do, as a government and as a people, to put to right the issues that have to be put to right to give ourselves prospects and prosperity again," Irish Prime Minister Brian Cowen told reporters. The government said there will be EUR10 billion of spending cuts and EUR5 billion in tax measures between now and 2014, with 40% of those cuts coming in next year's budget. Among the key measures are cuts to welfare, the minimum wage and public-sector staff numbers, pay and pensions. On the tax side, the government proposes an increase in value-added tax to 23% from 21% by 2014, cuts to pension relief and a new tax to fund local public services, as well as a shakeup of the income-tax system to bring in more low earners. Underpinning the plan is the government's expectation that the Irish economy will grow by 2.75% annually in the next four years. Juergen Michels, an economist at Citi, said this growth forecast is probably too optimistic. "We suspect that Ireland will probably still fail to meet its fiscal targets by 2014," he said in a note. The four-year plan also aspires to broaden Ireland's base of lenders to include more domestic pension funds and individual savers--85% of its bonds are held by overseas investors. "Faced with a buyers' strike, a further spike in yields and potentially an outflow from bank deposits, this is arguably not something that one would really want to draw attention to," said David Owen, chief European financial economist at Jefferies. Although Ireland's Fianna Fail-led coalition will almost certainly lose a general election due early next year, it must commit to this four-year plan to pave the way for a multibillion-euro bailout from the European Union and International Monetary Fund, and must pass a 2011 budget that is front-loaded with EUR6 billion of those cuts. The plan aims to cut Ireland's budget deficit to 3% of gross domestic product by 2014--and to 9.1% of GDP in 2011--from 32% of GDP in 2010, stabilize the fragile banking sector and allow the government to regain control of its public finances, but crucially it doesn't require a parliamentary vote. "The reality from this country is that we have to control the spiraling debt and reduce it. We have brought it under control; we are now taking a decisive step in reducing that debt and bringing it down to single-digit figures," said Finance Minister Brian Lenihan. The biggest challenge for this short-lived government still lies ahead: Lenihan will announce his 2011 budget on Dec. 7, which he has said must be passed in order for Ireland to receive an aid package currently being negotiated with the EU and IMF.