Ireland's budget cuts harshest in its history

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, Brian 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.