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Debt-hit Ireland Faces Toughest Budget Cuts In History

SHAWN POGATCHNIK   12/ 7/10 11:11 PM ET   AP

Ireland Budget Cuts

DUBLIN — Ireland must endure the toughest cuts and tax hikes in its history as an unavoidable price for saving the debt-burdened nation from bankruptcy, Finance Minister Brian Lenihan told lawmakers as they prepared to vote on a brutal 2011 budget.

Lenihan's plan – the harshest yet of four emergency budgets unveiled since 2008 to combat a runaway deficit – contains ?4.5 billion ($6 billion) in spending cuts and ?1.5 billion ($2 billion) in tax rises.

Lenihan told lawmakers he believes Ireland's economy can grow despite the fact that almost all 4.5 million residents face "a traumatic and worrying time." He said the depth of the cuts represents the minimum required to counter "the worst crisis in our history and one with few international parallels."

As he spoke, outside the wrought-iron parliament gates, hundreds of left-wing protesters gathered in icy weather to denounce the cuts as likely to hit the poorest citizens the hardest. Some banged drums, blew whistles 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 ($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 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 reneg 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 ($2.4 billion).

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 on regular government and at least ?45 billion to bail out its banks – yet collecting just ?19 billion this year in taxes. The staggering imbalance means an underlying deficit this year of 11.6 percent that, when bank-bailout costs are included, balloons to a modern European record of 32 percent of GDP.

He defended the government's reluctant decision last week to negotiate a ?67.5 billion loan fund from the European Union and International Monetary Fund, a Greek-style bailout that Ireland long had dismissed as unnecessary. The first ?10 billion in foreign loans is earmarked to bolster the cash reserves of five Dublin banks that the government has nationalized or is propping up.

Political analysts expect the budget to pass its initial vote Tuesday night, but its measures face several more votes through next month. Prime Minister Brian Cowen has pledged to resign and call an early national election once the budget is fully enacted in the spring.

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 to ?7.65 ($10.25) an hour. Fees for university students will rise 25 percent to around ?2,000 ($2,650) annually.

In hopes of stimulating Ireland's collapsed property market, Lenihan unveiled major cuts to the taxes on house sales valued less than ?1 million to just 1 percent, a fraction of the previous cost. A ?10 tax on air passengers will be cut in March to ?3 in hopes of boosting tourism.

And Lenihan said the government would spend ?200 million 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, will fall another 6 percent to ?215,000 ($285,000), while his Cabinet ministers will lose 5 percent of pay to ?180,000 ($240,000). By comparison, salaries for U.S. President Barack Obama are $400,000 and his Cabinet ministers $192,000.

Tax analysts said the income tax changes would hit the poorest the hardest, although those on 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. The highest rate, 52 percent, remains unchanged.

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 to ?140, and progressively ?10 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.

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Filed by Ryan McCarthy  |