x Abu Dhabi, UAEWednesday 24 January 2018

Ireland reveals cuts needed for bailout

Deep cuts to public spending and tax hikes are the pillars of the new package that would pave the way for an international bailout for its economy and banks.

DUBLIN // Ireland yesterday unveiled an austerity plan that involved deep cuts to public spending and tax hikes that would pave the way for an international bailout for its economy and banks.

It remained unclear whether the estimated €85 billion (Dh420bn) EU/IMF rescue package would quell the crisis engulfing the euro zone, with Spain coming under pressure from bond markets and fears mounting that Portugal will be the next country to seek emergency aid.

The government announced details to cut public spending by €15bn over four years in a bid to reduce its budget deficit to 3 per cent of gross domestic product by 2014, from 32 per cent. The measures seek to claw back €10bn through spending cuts and €5bn in tax increases - with €6bn of the cuts introduced in the 2011 budget, which the government hopes to push through parliament next month.

In an upbeat presentation aimed at boosting public morale, the country's prime minister, Brian Cowen, urged Ireland to "pull together as a people to confront this challenge, and do so in a united way".

The package included cuts of nearly 15 per cent in the social welfare budget, saving €3bn a year, a reduction in the public-sector pay bill of €1.2bn and a 2 per cent increase in value-added tax. Child benefits and other social welfare payments will be reduced, and the minimum wage will be cut by €1 an hour to €7.6.

As expected, the plan did not entail changes to Ireland's corporation tax, despite pressure from other European countries, who believed the 12.5 per cent rate was unfairly low.

A small group of protesters demonstrated outside parliament, with one of the largest trade unions, SIPTU, dismissing it as "a road map to the Stone Age and a declaration of war on low income earners".

The measures follow two years of draconian cuts that have driven support for Mr Cowen's once popular Fianna Fáil party to an all-time low.

Mr Cowen this week fended off internal leadership challenges, but was forced by his junior coalition partners, the Green Party, to commit to holding an early general election next year, after first trying to win backing for the 2011 budget that will secure the EU/IMF rescue.

Mr Cowen is racing to conclude talks with EU and IMF officials, who arrived in Dublin a week ago, bringing to an end the government's efforts to cope with its runaway bank bailout programme, which had turned into a sovereign debt crisis.

Details have emerged of the government's plans under the EU/IMF deal to inject capital into the country's two dominant banks, AIB and Bank of Ireland, a move that would leave the state with effective control of the country's three main banks. The government could be left with majority control of Bank of Ireland and more than 99 per cent of AIB, according to The Irish Times. Officials have said they wanted to "overcapitalise" the banks to reassure the markets they have reserves to cover their debts, before downsizing the sector as part of the EU/IMF bailout.

The government has committed €45bn of taxpayers' money to bail out Irish banks whose lending in recent years fuelled a property bubble that imploded in 2008.

The amount of the EU/IMF loan has not been finalised, but Mr Cowen said it could total €85bn. A large part of the loan will be used to allow the government to avoid borrowing money for the day-to-day running of the country at punitive bond market rates for the coming three years.

While the agreement was not due to be finalised until the end of the month, concerns were already growing about Ireland's ability to service the loan at an interest rate that some economists expect may be 7 per cent - higher than the 5 per cent charged to Greece when it received a similar bailout earlier this year.

The European Union president, Herman Van Rompuy, attempted yesterday to ease fears that Ireland's troubles would spread to Portugal and other weak euro zone countries.

"If we are told that there is contagion, it is not on an economic basis, it is not on a rational basis," Mr Van Rompuy told the European Parliament in Strasbourg. Unlike Ireland, Portugal "does not suffer from a housing bubble, its financial sector is comparatively not very big, its banks are well capitalised," he said.

A one-day strike by Portugal's two largest trade unions against government austerity measures brought the country to a standstill yesterday.