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Irish government unveils 4-year austerity plan

24 November 2010 19:01 (UTC +04:00)

Baku â€“ APA. Ireland’s government unveiled a 15 billion euro ($20 billion) four-year austerity plan on Wednesday imposing deep spending cuts and tax increases to help pay for a bank crisis and meet the terms of an EU/IMF rescue, APA reports quoting â€œReutersâ€.
The plan includes thousands of public sector job cuts, phased-in increases in Ireland’s value-added tax (VAT) rate from 2013 and social welfare savings of 2.8 billion euros by 2014, but does not touch the country’s ultra-low corporate tax rate.
"The size of the crisis means that no one will be sheltered from the contribution that has to be made toward national recovery," Prime Minister Brian Cowen told a news conference.
Crucially, the plan retains economic growth assumptions unveiled earlier this month which many economists believe are over-optimistic, given the likely effect of the cuts on already fragile domestic demand.
"It doesn’t seem all that realistic to me," said Stephen Lewis, chief economist at Monument Securities. "It seems they’re planning very stringent fiscal measures and yet they expect the economy to grow against that background. That seems highly unlikely."
The Irish/German 10-year yield spread -- measuring the premium investors demand for holding riskier bonds issued by the Dublin government -- hit a day’s peak of 660 basis points before slipping slightly.
The yield on 10-year Irish bonds stood at a 9.23 percent -- a level that Dublin could not realistically issue bonds at, and far above the 2.63 percent on the equivalent German bond.
The euro, which has fallen sharply in recent days on fears that Ireland’s debt and budget crisis would spread to other euro zone countries, barely budged.
The plan is a condition for an EU/IMF rescue under negotiation for a country long feted as a model of economic development that has become the latest casualty in the 16-nation common currency bloc’s emergency ward.
A Reuters poll on Wednesday showed that 34 out of 50 analysts surveyed believe Portugal, where unions held a general strike on Wednesday, will be forced to follow Ireland and seek a bailout.
If that occurred, fears about Spain would grow and investors could begin to worry about the future of the currency zone that was set up over 11 years ago and regarded as a major success in its first decade of existence.
Slovak Finance Minister Ivan Miklos added to the gloom, saying that "the risk of a euro zone break-up, or at least its very problematic functioning, is very real.
A CURSE FOR GENERATIONS
The sudden implosion of Ireland’s economy has bewildered its people. Unemployment -- a curse for generations of Irish which had almost lifted in the boom years -- has leapt from about 4 percent to about 14 percent in just a few years. The middle class, working class, young and old have been making their ways to the welfare office, many for the first time.
Anne Fullham, a 44-year-old property lawyer who lost her job in March, never dreamed she would find herself taking benefits. "When I was growing up ... it was the safest job you could possibly have -- if you’re a doctor, a lawyer, an architect. And now the architects and the lawyers are in trouble," she said.
"We still all laugh about it in such a way that if you didn’t, you’d cry," she said.
Cowen told parliament no final figure had been agreed for EU/IMF financial assistance, "but an amount of the order of 85 billion (euros) has been discussed.
The Irish Independent newspaper said the situation was so critical that Dublin could pump extra cash into the ailing banks as early as this weekend, well before the first European and International Monetary Fund funds are set to arrive.
The European Commission said talks were progressing smoothly but would take several more days. "Hopefully it can be concluded around the end of November -- I cannot be more precise than that," a spokesman told reporters in Brussels.
Once a loan agreement is signed, it has to be approved by European finance ministers and the IMF board before the first funds can flow, and disbursements are likely to be linked to benchmarks such as the adoption of the 2011 budget.
An erosion of support from the government coalition partners this week means Cowen is unlikely to survive in office much beyond the New Year to implement the plans.
But his successor’s hands will be tied by the terms of an agreement to be signed with the EU and the IMF, and Ireland’s financial crisis will leave little scope to revise them.
"There has never been such a political shambles in the history of the State," Irish Times columnist Stephen Collins wrote. "The coalition crumbling just days before the publication of a four-year budgetary strategy has added a whole new layer of uncertainty to an already volatile situation."
Voters in the former "Celtic Tiger" have already endured two years of steep cuts in government spending, a collapse in house prices, a record-setting recession and a surge in unemployment.
Years of economic growth led to a property bubble and when it burst the government guaranteed the debt run up by banks, foisting most of the burden on to taxpayers.