Ireland's budget cuts harshest in its history

[Guest guest]

http://www.cbc.ca/world/story/2010/11/24/ireland-debt-crisis-aid-amount.html

Ireland's budget cuts harshest in its history

Low business tax rate stays intact

Last Updated: Wednesday, November 24, 2010 | 10:35 AM ET CBC News

Ireland unveiled the harshest budget measures in its history Wednesday, a

four-year plan to claw back 15 billion euros ($20.4 billion Cdn) using spending

cuts and extra taxes.

Some 24,000 state employees could lose their jobs and the sales tax could soar

to 23 per cent.

Altogether, the program would cut spending by about one-fifth and raise five

billion euros ($6.8 billion Cdn) in extra taxes over the next four years.

It included welfare cuts of 2.8 billion euros ($3.8 billion Cdn) and income tax

increases of 1.9 billion euros (2.6 billion Cdn).

Those moves are among the steps planned to narrow the budget deficit to three

per cent of gross domestic product by the end of 2014.

The plan is a condition set by the EU and IMF for their aid in bailing out the

country's troubled banking system.

" Those who can pay the most will pay most, but no group can be sheltered, " the

government said in a report. " Postponing these measures will lead to great

burdens in the future for those who can bear them. "

The minimum wage will fall by one euro to 7.65 euros ($10.39) and income tax

bands will be widened so more lower-paid workers pay taxes, and middle-class

workers can expect their annual taxes to rise more than 3,000 euros ($4,100).

Business tax not cut

Ireland did not increase its exceptionally low 12.5 per cent rate of tax on

business profits, which is less than half the EU average and has helped to lure

about 1,000 high-tech multinationals.

France, Germany, Austria and Britain all have called for Ireland to raise that

rate, arguing it amounts to unfair competition at a time when other EU members

will have to raise their own debt-fuelled borrowings to lend money to Ireland.

The announcement came the same day as the prime minister, Cowen, said that

its bailout loan could total 85 billion euros ($115 billion Cdn).

Some analysts said that figure would be much too small to save the country from

eventual default.

Overnight, credit ratings agency Standard & Poor's lowered its long-term rating

on Ireland's financial reliability by two notches to A from AA- and warned that

there could be further downgrades.

Bank shares fell a third straight day Wednesday on the Irish Stock Exchange, as

concerns grow that shareholders will be left with nothing if the government is

forced to seize total control of the country's two dominant banks, Allied Irish

and Bank of Ireland.

Bank of Ireland fell 27 per cent to a record low and Allied Irish fell 18 per

cent to just off its record low.

Ireland has already nationalized three other banks left bankrupt by the 2008

collapse of the country's decade-long real estate boom.

Property prices have slumped by more than 50 per cent, hundreds of thousands of

homeowners are trapped in homes no longer worth what they owe and the heads of

many of Ireland's construction companies have declared bankruptcy or fled the

country.

Budget to come Dec. 7

The plan aims to cut Ireland's 2014 deficit to three per cent of gross domestic

product, the euro zone limit. This year's deficit is forecast to reach 32 per

cent, a modern European record.

The austerity plan came ahead of the government's Dec. 7 publication of its 2011

budget, which is expected to call for tax hikes and the deepest spending cuts in

the 88-year history of independent 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.

Cowen told lawmakers the 85 billion euros would represent an overdraft or credit

line, not the total required immediately.

He also said the final terms were still subject to detailed negotiations with

International Monetary Fund and European Commission experts who descended last

week on Dublin to pore over the books of both the government and the banks.

Some financial analysts declared that Ireland — crippled both by a runaway

bank-bailout program it can no longer afford and the worst deficit in Europe —

will need far more cash to forestall national default in a few more years, when

many government bonds and the developing EU-IMF loan come due for repayment.

" If we do take this loan, then two to three years down the road we will be

forced to restructure our sovereign debt. We will be in a full default across

the entire country, " said Gurdgiev.

With files from The Associated Press