Jobs cut, taxes up as Ireland unveils austerity budget
The Irish government has unveiled an austerity budget with a two thirds emphasis on spending cuts and one third on tax rises.
The country's debt crisis, which has wrecked its economy and led to an €85 billion EU and IMF bail out, must be addressed through austerity measures. These include a reduction in the minimum wage, a new property tax and the loss of thousands of public sector jobs.
The four-year plan will save €15 billion, with as much as €6 billion in savings being delivered in 2011. It is due to cost Irish taxpayers more than €1,000 a year each.
The recovery plan at a glance:
• 24,750 public sector jobs to be cut
• Social welfare cuts of €2.8 billion
• Income tax increases to raise a further €1.9 billion
• Minimum wage to be reduced by €1 to €7.75 an hour
• VAT to rise from 21% to 22% in 2013 and then to 24% in 2014
• A new property tax – ‘site value tax' – which will cost most homeowners around €200 a year by 2014
• Spending on health and education to be protected as far as possible
• Corporation to be maintained at 12.5%
Despite the huge swathes of public sector jobs being lost, Taoiseach Brian Cowen said that job creation was the rationale behind the plan and that he would reduce unemployment by 10% within four years.
Cowen said he hoped the plan would "bring certainty to our people to make sure they have hope for the future".
"We can and will pull through as we have in the past. We love our country and we want to make sure our children have a future here too." He added that the plan was also "about growing the economy and identifying those sectors of the economy that are proving to be successful".
Finance minister Brian Lenihan explained that the drastic cuts were needed to reduce the budget deficit from its current level of 11.7% to 9% next year.
Despite continued calls for an immediate general election, Cowen made no further comment on the matter. Last week he said he expected it to happen in the new year.
The Irish parliament is due to pass the budget plans on 7 December.
"Then, whenever we have that completed...," Cowen said, "the people can decide who they want to govern the country."
Analysts reacted quickly – and without much optimism – to the budget announcement. "Any hopes that the publication of further details of the Irish government's fiscal plans for the next four years might settle markets' nerves appear to have been dashed," said Capital Economics' European economist Ben May.
He pointed out that the day's 10-year government bond yields have risen by a further 30 basis points to about 8.5%, bringing them close to their early November peak.
"In all, then, there appears little hope of the crisis in Ireland calming until the political uncertainty has been overcome and the bank support measures are shown to be yielding results," he said, adding:
"Even in the unlikely event that the government can quickly achieve both of these, we still think that it faces an almost insurmountable task of getting public debt down to a more sustainable level, which will eventually leave it with no choice but to default."
David Owen, chief european financial economist Jefferies International, commented: "Perhaps the most important statement in the just published 140 page National Recovery Plan 2011-2014 was on page 80 when the Department of Finance highlighted that almost 85% of Irish bonds are held by overseas investors.
"Faced with a buyers strike, a further spike in yields and potentially an outflow from bank deposits this is arguably not something that one would really wish to draw attention to."
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.