Ireland Goes Bust

[Jan Klimkowski]

The Usual Suspects are very happy.

The poor get stuffed.

Deja vu all over again.

Irish budget praised by EC as 'tough and ambitious'

European commission welcomes Ireland's drastic budget cuts but accountants warn that the poorest will pay the price

Graeme Wearden guardian.co.uk, Wednesday 8 December 2010 13.29 GMT

The European commission has hailed Ireland's austerity budget as "tough and ambitious" but accountants have warned that the Irish people face many years of painful tax rises and spending cuts.

Speaking in Brussels, EC spokesman Amadeu Altafaj welcomed the measures announced by Brian Lenihan yesterday, which were passed last night in the Dáil.

"It is a successful first step towards the implementation of the programme that was agreed with the EU and the IMF," said Altafaj. "It is an ambitious and indispensable tool for the redressment of the situation. There is the right balance between revenue and expenditure measures."

The measures contained in the budget will save around €6bn (£5bn). They include a 4% cut in social welfare, €10 a month reductions to child benefit, and rises in petrol and diesel duty. Income tax revenues will also increase sharply, with tax credits and income tax bands being cut by 10%. Public sector pensions have been frozen, and new government workers will have an immediate 10% pay cut.

The austerity measures will allow Ireland to tap into the €85bn fund agreed with the International Monetary Fund (IMF) and the European Union. This package was designed to prevent Ireland defaulting on its debts or quitting the euro.

Ireland remained under pressure in the bond markets today, even though the budget passed its first hurdle last night. The yield, or rate of interest, on Ireland's 10-year government debt had dropped to 7.83% this morning, from 8.19% yesterday, but then rose back to 7.99% by lunchtime today.

Ireland is committed to cutting €15bn over the next four years, bringing its deficit down to 3% of GDP by 2015. The deficit is due to hit 32% of GDP this year, partly as a result of the cost of the Irish banking rescue.

Some critics have claimed that Ireland would be better advised to default on its debts, rather than push through tough austerity measures. Finance minister Brian Lenihan attempted to crush such talk today. "A small country like Ireland cannot default without the support of a central bank because you have to have the bank loaded with cash while you're engaged in such a default and it's not feasible for us to do this," Lenihan told RTÉ radio.

"We really need to face up to this because we've allowed public discussion to become dominated by it and it has done huge damage to the country," he added.

Deloitte, the accountancy firm, believes that the Irish budget cutbacks are both unpleasant and unavoidable.

"As unpalatable as they are, it is an important step in addressing the imbalance in our public finances but more importantly a significant message to the international community that Ireland is prepared to take the hard decisions to put its house in order," said Deloitte.

"These changes must be seen as a first step on a long road – they only address 40% of the overall adjustment that is required to get us to the deficit being only 3% of GDP."

Shaun Murphy, partner at KPMG, agreed that the budget changes would have a major impact on all parts of Irish society – but particularly the less well-off.

He said: "For many earners on low and middle incomes, budget 2011 represents the start of a painful reversal of a policy which sought to minimise the number of earners within the tax net and to minimise the numbers taxed at the marginal rate."

"For many higher income earners, budget 2011 represents a continuation of what has been a very substantial increase in their individual effective income tax rates – with many higher earners set to pay tax at an effective rate in excess of 40% in 2011," he added.

Some economists fear that growth in the Irish economy will be stifled by the cutbacks and tax rises.

"The Irish situation is pretty drastic," said Charles Dumas, research director at London-based Lombard Street Research. "They won't get the deficit improvement they're hoping for because they are hammering the economy."

http://www.guardian.co.uk/business/2010/...ish-budget