December 9, 2009 / 4:40 PM / 8 years ago

Irish 2010 budget delivers promised painful savings

<p>Minister for Finance, Brian Lenihan, poses with his budget report as he arrives at government buildings in Dublin, December 9, 2009.Cathal McNaughton</p>

DUBLIN (Reuters) - Ireland's 2010 budget on Wednesday delivered promised savings of more than four billion euros (3.6 billion pounds), slashing public pay and welfare in a bid to halt a soaring deficit and set it apart from other struggling euro zone states.

Cuts of 1 billion euros in public sector pay and 760 million euros on welfare spending brought screams of protest from unions and opposition deputies, but the first of the budget resolutions passed later and commentators said it looked safe.

Economists were encouraged that the government had made good on cuts that it must make to halt growth of its deficit at almost 12 percent of gross domestic product (GDP) and adjust to the collapse of Ireland's property-fuelled economic boom.

But Finance Minister Brian Lenihan also reduced the savings targets for 2011 and 2012 to 3 billion annually from 4 billion and analysts doubted his prediction that this was the last of the difficult budgets.

"This was a genuinely encouraging start," said Eoin Fahy, Chief Economist with KBC Asset Management in Dublin.

"Unfortunately this is only the beginning of a multi-year process, and we are faced with the prospect of another four or more budgets as tough as this one before we get even close to budgetary balance."

The impact on Irish pockets of the financial crisis has been as dramatic as anywhere in the euro zone, with unemployment doubling in 18 months and house prices halving as many families struggled to meet still high mortgage payments.

OPTIMISM

Lenihan's growth forecasts were slightly more optimistic than previously. He said unemployment would prove lower than earlier forecast, the deficit would fall next year to 11.6 percent of GDP and the economy would shrink only 1.25 percent in 2010. Earlier he had forecast a 1.5 percent contraction.

"Our plan is working, we have turned the corner," he said. "The effort demanded of every citizen in this budget is substantial, but it is the last big push of this crisis."

<p>Minister for Finance, Brian Lenihan, arrives at government buildings in Dublin, December 9, 2009.Cathal McNaughton</p>

The finance ministry also said its funding needs for next year would fall to below 20 billion euros compared with the 35 billion raised this year, good news for bond markets who have punished smaller euro zone states this week after a debt ratings downgrade for Greece.

"(The budget delivers) all that had been flagged and a bit more," said Rossa White, Chief Economist at Dublin brokerage Davy. "They made the difficult decisions, the cuts in public sector pay and social welfare. The bond market will like it because it is focussed on spending rather than on tax."

The premium investors demand to hold 10-year Irish bonds rose though to 195 basis points versus benchmark German Bunds by the end of European trade on Wednesday, hit by a ratings outlook cut for Spain that further undermined sentiment.

THIN MAJORITY

The budget also provided for a new 15 euro per tonne tax on carbon emissions as well as signalling a switch to a simpler income tax system with just two charges on wages. It left corporate tax -- a draw for foreign investors in Ireland over the last decade -- at 12.5 percent and said it would stay there.

"The minister has based this on wishful thinking," said opposition party Fine Gael's finance spokesman Richard Bruton.

"People will look at this and say it is simply not fair. Ministers are taking a pay cut ... but the cleaners in their offices will be taking a bigger cut," he told public TV.

Analysts expect the government to get the support of the handful of MPs it needs to pass the budget although two have threatened to withdraw support in the past week.

Failure to pass the budget would lead to a snap election that would almost certainly be won by a coalition led by the centre-right Fine Gael. But the first vote went 88-75 for the government, although the most sensitive vote on welfare cuts is not until later in the week.

"I am supporting the government," independent deputy Jackie Healy-Rae told RTE radio. "It will be tough but what is the alternative: do we want the IMF taking over the finances of the country?"

Writing by Andras Gergely and Patrick Graham

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below