Irish Unveil Harshest Cuts, Tax Hikes in History

Ireland unveiled the harshest budget measures in its history Wednesday, a four-year plan to slash deficits euro15 billion ($20 billion) so it can get a massive bailout from the European Union and the International Monetary Fund.

The plan seeks to cut euro10 billion ($13.3 billion) from spending and raise euro5 billion ($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 even Prime Minister Brian Cowen to concede it will hurt the living standard of everyone in the nation.

Analysts, meanwhile, feared that the size of the EU-IMF bailout -- estimated at euro85 billion ($115 billion) — will be too little to save Ireland from an eventual default.

And 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.

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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 unfathomable 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.

"This is a road map back to the Stone Age," said Jack O'Connor, president of Ireland's largest union, SIPTU.

He noted that Ireland had already suffered nearly euro15 billion in cuts and tax hikes since 2008, gutting economic growth and helping to double unemployment to 13.6 percent.

"Ireland needs a strategy for growth, but this plan will achieve the opposite," O'Connor said.

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 by euro1 to euro7.65 ($10.20).

Ireland's bloated civil service will be particularly hard hit — seeing cuts of about euro1.2 billion and 24,750 state jobs lost.

Income tax bands will be widened so more lower-paid workers pay taxes, and middle-class workers will see annual taxes rise more than euro3,000 ($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 euro40,000 ($53,000) of income will avoid tax.

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 lure 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 Brian Lenihan 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 like 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 be the basis for any sensible proposals for the next general election. Anything else that's put forward is nonsense."