Brian Cowen, Ireland’s prime minister, on Sunday set his right-of-centre government on a potential collision course with trade unions by signalling plans to make deep cuts in services and public sector wages in December’s budget.
Mr Cowen, leader of the populist Fianna Fail party, told the Sunday Independent newspaper: “There comes a time when you can’t continue to borrow at the rates we are doing. And that time has come.”
David Begg, the leader of Ireland’s trade unions, warned the country was “on a trajectory to tear ourselves apart”. He also predicted it would be “hugely damaging for Fianna Fail in the long run as a party”, and told the Financial Times the cuts would “alienate the labour movement for generations”.
The government is looking to make €4bn ($6bn) of savings, either by tax increases or expenditure cuts, to contain a spiralling fiscal deficit, which is four times the 3 per cent of national output limit set by the European Union for members of the eurozone.
Economists say welfare and public sector pay cuts will bear the brunt of the adjustment when Brian Lenihan, the finance minister, announces his budget on December 9.
The Economic and Social Research Institute, an independent think-tank, last week said that even with the savings Ireland would still be borrowing around 12 per cent of national output to finance the deficit.
The ESRI said the government’s plan to cut expenditure in the midst of the recession “runs counter to the basic tenets of countercyclical policy”. However the institute says Ireland’s structural deficit, that part of the deficit which remains even after growth has been restored, was so large that a stimulus package as proposed by trade unions was not an option.
Mary Harney, health minister and former deputy first minister, on Friday said Ireland may have to seek the help of the International Monetary Fund. Concerns over Ireland’s ability to stabilise its public finances are reflected in Ireland’s sovereign cost of borrowing, which is more than any other eurozone country, including Greece, in spite of the fact that Greece’s debt levels are much higher.
Mr Cowen said at the weekend: “We have a clear choice coming to the budget – pay now or pay much more later.”
But Mr Begg said it is not possible to make the adjustments envisaged by 2013 as the government has agreed with the European Commission. The Irish Congress of Trade Unions is calling for a extension of the timetable to 2017.
Mr Begg also doubts the “capacity of the government to achieve the savings in a fair way”.
The 300,000 public sector workers have already taken a 7.5 per cent cut in take home pay as a result of the pension levy announced in February. Mr Begg warned of a “deflationary shock” if further cuts are imposed.
He said: “ The solutions that are being put forward are just more versions of neo- liberalism and it’s going to end in tears – no question.”
The government is set for a major confrontation with the trade unions, who are organising a day of national protest on November 6.