Brian Lenihan, Ireland’s finance minister, called for sweeping cuts across the board to stabilise the shattered public finances on Wednesday as he announced the harshest budget in decades in an attempt to restore Dublin’s credibility with international debt markets.
Public sector pay cuts and reductions in unemployment and child benefits were among €4bn (£3.6bn, $5.9bn) of savings announced to restrain the deficit to a projected 11.6 per cent of gross domestic product next year.
Ireland, the first eurozone economy to go into recession, faces one of the largest budget deficits in the European Union after the collapse of a 10-year housing and consumer boom. Mr Lenihan said Ireland had “been running to stand still” this year as spending reductions had been offset by increased unemployment costs and higher debt service outlays.
But he predicted that the country was “now on the road to economic recovery”.
The government raised its forecasts for GDP, which is poised to decline 1.3 per cent next year after falls of 7.5 per cent this year. The economy is seen returning to growth in the second half of 2010. In April the forecast was for a contraction next year of 2.9 per cent.
Mr Lenihan said the pay reductions he was announcing were “simply a matter of budgetary necessity in these extraordinarily difficult times”. The cuts range from 5 per cent for public employees on less than €30,000 to 20 per cent for Brian Cowen, the Irish prime minister.
Unions labelled the budget “callous, unjust and uncaring”.
The burden of adjustment was on the spending side, with the only new tax measure being a carbon tax. Corporate tax at 12.5 per cent “will not change”. Mr Lenihan stressed it was “important in a time of great uncertainty for international business . . . that we send out a clear message”.
Responding to union anger at the number of Irish tax exiles, the finance minister, announced a €200,000 levy on anyone domiciled in Ireland earning more than €1m and whose Irish wealth was more than €5m, regardless of tax residency.
Before the announcement, Dublin had made €8bn of budget savings since the onset of the financial crisis .“Had we not done so, the deficit would have ballooned towards 20 per cent of GDP, a level at which the very financial survival of this country would have been at risk,” Mr Lenihan told parliament.
However, investors sold Irish government bonds amid growing fears for Greece’s public finances. The yields on Irish bonds jumped sharply, with the 10-year yield rising 0.2 percentage points.
Richard Bruton, finance spokesman for the conservative opposition Fine Gael party, seized on the absence of any statement in the budget about the likely transfers next year to recapitalise Anglo Irish Bank, the scandal-hit property lender that was nationalised in January.
He said there was “a deafening silence on what Anglo Irish is going to suck out of the next year’s budget”.
Analysts believe the bank will need several billion of extra capital once it has crystallised losses on property loans transferred to the National Asset Management Agency, the bad bank the government has set up to cleanse the sector and restart lending.