Irish unveil harshest cuts, tax hikes in history
Updated: 2010-11-25 09:10
DUBLIN - Ireland has unveiled the harshest budget measures in its history, a four-year plan to slash deficits by euro15 billion ($20 billion) so it can receive a massive bailout from the European Union and the International Monetary Fund.
Even Prime Minister Brian Cowen conceded Wednesday the plan would hurt the living standard of everyone in the nation.
Yet analysts still expressed doubts that the EU-IMF rescue loan, which Cowen said would be about euro85 billion ($115 billion), would be big enough to save Ireland from an eventual default.
And bank shares plummeted for a third straight day on the Irish Stock Exchange, reflecting growing expectations that investors will be wiped out if the government is forced to seize majority 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.
Ireland is still negotiating the terms of the bailout with European Central Bank and IMF experts. The government hopes its tough budgetary medicine will permit the country's 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 exceeding that rule, Ireland's deficit this year is forecast to reach 32 percent of GDP, a modern European record, fueled by exceptional costs from its 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.
The EU's financial affairs commissioner, Olli Rehn, said the package "strikes a good balance ... to protecting the least well off." He said Ireland's determination to narrow its deficits quickly provided "a sound basis" for the bailout talks.
But outside the guarded iron gates of Cowen's office, about 100 activists denounced the government and the IMF.
"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," said O'Connor, who plans to lead a Dublin protest march on Saturday against the cuts.
Fellow Europeans have marveled at how the Irish, despite facing the eurozone's harshest cuts, have responded with only token protests until now. Glum acceptance remained the prevailing mood on Dublin's wintry streets.
"For the next 10 years we're going to be paying for this bailout," said Jordan Lancaster, a 29-year administrator at the Justice Department. "But they had to do it. There really wasn't any other choice."
Ireland's 140-page National Recovery Plan proposes to introduce property and water taxes, raise the sales tax from 21 percent now 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.
Income tax bands will be widened so more lower-paid workers pay taxes, and higher-waged 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 and monthly pensions will fall up to 12 percent.
Ireland's legendary tax-free status for authors, musicians and artists will be cut back so 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 demanded that Ireland 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 Ireland would be shooting itself in the foot if it did anything to scare off foreign investment. The foreign companies, including 600 US 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.
He 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."
Ireland's financial shares suffered another bloodbath on the Irish Stock Exchange, but partly rebounded from record lows in the afternoon.
Bank of Ireland fell 33 percent to euro0.20, a record low, and closed at euro0.27. Irish Life & Permanent - an insurance and mortgage specialist that has yet to receive a state bailout - fell 16 percent to close at euro0.63, also an all-time low. Only Allied Irish bucked the trend, falling 18 percent but then rebounding to close up a cent at euro0.34.
Ireland has already nationalized three other banks left bankrupt by the 2008 collapse of the country's decade-long real estate mania. Property prices have slumped by more than 50 percent, hundreds of thousands of homeowners are trapped in homes no longer worth what they owe, and many of Ireland's construction barons have declared bankruptcy or fled the country.
The government already owns 36 percent of Bank of Ireland and 18 percent of Allied Irish. The bailout experts' requirement for greater capital reserves will have to be provided by the government, a process that analysts say will quickly lead to both banks' nationalization, a fate Ireland has spent billions already trying to avoid.
"Irish banking shares will never - or not for a long time - be worth anything. The solution requires the total destruction of the existing share base," said David McWilliams, a former Irish Central Bank economist and European hedge fund manager.
McWilliams warned that deepening austerity would only drive Ireland back into a recession, reducing tax revenues and widening the deficit again. He appealed for Ireland to abandon its 2008 bank guarantee to repay all of the banks' borrowed billions, and instead require foreign bondholders to share the losses as Germany wants.
"The end game is simple," McWilliams said. "Either we take the pain and the economy is crushed, as the government insists, or the people who lent the money ... take the pain, as they should, and the economy can breathe."
But Britain and Germany both have exposures to Irish banks exceeding $200 billion each, according to the Bank for International Settlements. Governments across the 16-nation eurozone warn that allowing Irish loans to default would send shockwaves through Europe's interdependent banking system.
Credit ratings agency Standard & Poor's raised its risk assessment of Ireland. The New York-based agency lowered its long-term rating on Ireland's financial reliability two notches to A from AA- and kept a negative outlook, meaning further downgrades loom.
S&P's measurement of short-term risks also fell one notch to A-1. Ireland until now, surprisingly, held the highest grade of A-1+.
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