Irish Lawmakers Offer Initial OK for Brutal Budget

Wednesday, 08 Dec 2010 07:23 AM

 

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Lawmakers narrowly approved tax hikes as part of Ireland's most brutal budget in history, a euro6 billion ($8 billion) slash-and-tax plan imposed as a key condition of the nation's international bailout.

Rejection following Tuesday's publication of the long-awaited 2011 budget would have forced Prime Minister Brian Cowen's resignation and snap elections — and raised doubts about whether Ireland could tap 67.5 billion euros ($90 billion) from the European Union and the International Monetary Fund.

But Cowen survived thanks to an 82-77 vote in favor of midnight hikes in taxes on vehicle fuel. The complex budget faces several more parliamentary tests between now and February, with at least three separate votes for major bills on welfare cuts, sweeping expansion of the income-tax net and other measures.

Unveiling the budget, Finance Minister Brian Lenihan said every household in this country of 4.5 million must take hits on their net incomes to close Ireland's staggering deficit.

Lenihan said Ireland had no choice but to slash spending and raise taxes immediately because the country this year is spending more than 50 billion euros on daily government activities and has committed at least 45 billion euros to bail out its banks — yet is collecting just 31 billion euros this year in taxes.

The result has been an underlying deficit this year of 11.6 percent of Ireland's gross domestic product, second-worst in the 16-nation eurozone to fellow aid patient Greece. When exceptional bank-bailout costs are included, as European Union authorities have required, Ireland's 2010 deficit skyrockets to a modern European record of 32 percent of GDP.

Lenihan's plan — the harshest yet of four emergency budgets unveiled since 2008 — contains 4.5 billion euros ($6 billion) in spending cuts and 1.5 billion euros ($2 billion) in tax rises. A potential further 9 billion euros ($12 billion) in cuts and tax hikes loom for 2012-14.

He said these measures represent the minimum required to counter "the worst crisis in our history" and put Ireland on course to reduce its deficit to the eurozone limit of 3 percent by 2015 as EU authorities expect.

As Lenihan spoke, outside the wrought-iron parliament gates, several hundred left-wing protesters endured icy weather to denounce the cuts as likely to hit the poorest citizens the hardest. Some banged drums, blew whistles, clanked cattle bells and tooted horns. Many more waved placards demanding that Ireland's state-aided banks default on their hundreds of billions in debts to foreign banks — a notion that Lenihan dismissed as economically suicidal.

The finance chief stressed that Ireland faced no easy choices as it deepens its austerity measures while simultaneously seeking to grow its economy.

He called the 80 billion euros ($105 billion) that Ireland's banks are estimated to have lost on dud property loans "unforgivable" — yet defended the need for Ireland's taxpayers to foot the lion's share of that bailout bill rather than the foreign banks that loaned Dublin institutions the money.

"There's simply no way this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of our European partners and the European institutions," Lenihan said. "This course of action has never been an option during the course of this crisis."

Instead, Lenihan said income taxes would be broadened to bring tens of thousands of low-salaried workers into the tax net for the first time, while welfare payments would be cut across the board. Spending on capital projects — chiefly jobs-intensive building of roads and public transportation networks — would be cut by 1.8 billion euros ($2.4 billion).

He defended the government's reluctant agreement last week on an EU-IMF bailout similar to the one given Greece, a move that Ireland long had dismissed as unnecessary. The first 10 billion euros in foreign loans is earmarked to bolster the cash reserves of five Dublin banks that borrowed recklessly from abroad to fund an Irish property boom that went bust in 2008. The government since has nationalized or taken major stakes in all five banks.

The deeply unpopular Cowen — who rose to power 2 1/2 years ago just as Ireland's vaunted Celtic Tiger boom was petering out — has pledged to resign and call an early national election once the budget is fully enacted in the spring. But he has refused to specify an election date.

Lenihan said pensions for retired state employees will fall 4 percent, while Ireland's civil service will be cut back to 2002 levels. Taxes on vehicle fuel and cash deposits would rise 2 percent to 4 percent. The minimum wage would be reduced 1 euro to 7.65 euros ($10.25) an hour. Fees for university students will rise 25 percent to around 2,000 euros ($2,650) annually.

In hopes of stimulating Ireland's collapsed property market, Lenihan unveiled major cuts to the taxes on house sales to just 1 percent for properties valued under euro1 million, a fraction of the previous tax rate.

A 10 euro tax on air passengers will be cut in March to 3 euros in hopes of boosting tourism.

And Lenihan said the government would spend 200 million euros to put 15,000 of Ireland's 450,000 unemployed into training and internship positions.

Ireland's leaders — long among the best paid in the world — sought to address public anger by taking more hefty pay cuts themselves. Cowen's salary, already down from a 2008 high of 285,000 euros, will fall another 6 percent to 215,000 euros ($285,000), while his Cabinet ministers will lose 5 percent of pay to 180,000 euros ($240,000). By comparison, in the U.S., President Barack Obama receives a salary of $400,000 and his Cabinet secretaries $192,000.

Tax analysts said the income tax changes would hit the poorest the hardest, although those with six-figure salaries already surrender more than 45 percent of their income. The starting points for the basic 20 percent rate of income tax and higher 41 percent both will be lowered, while those on the lowered minimum wage will still escape the income-tax net.

But tax analysts said a new combined extra charge for funding Ireland's state pensions and healthcare will raise the effective income-tax rates to nearer 31 percent and 52 percent.

A rolling cut in Ireland's generous state payments for children means that large young families — still common in Ireland with its European-high birth rate — will suffer a particularly sharp fall in benefits. The monthly payment per child will fall 10 euros to 140 euros, and progressively 10 euros more for each third, fourth and subsequent child.

Lenihan conceded that a failure to secure the EU-IMF bailout would have raised "serious doubts" about Ireland's ability to pay its bills from mid-2011 onward.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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