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Irish austerity plan

November 24, 2010

The Irish government has given details of its most stringent austerity plan ever, aimed at saving 15 billion euros over the next four years. The cuts are necessary to secure a multi-billion-euro international bailout.

Euro coin and note
There are fears that the Irish crisis could endanger the euroImage: picture-alliance/dpa

Ireland has set out a four-year plan to save 15 billion euros ($20 billion) in order to secure an international bailout expected to be in the region of 85 billion euros.

Under the National Recovery Plan, the Irish Republic aims to bring its budget deficit down from a projected 32 percent of gross domestic product (GDP) to three percent of GDP by 2014 by imposing tax increases, wage cuts and by curbing public spending.

"We can and we will pull through this as we have in the past," Prime Minister Brian Cowen told a news conference in Dublin.

"We are a smart, resilient, proud people and we are going to come through this challenge because we love our country."

Finance Minister Brian Lenihan, meanwhile, stressed the urgency of the situation.

"If we do not make these savings, we have no credible way of borrowing money to pay for our social welfare and health and education sectors from the middle of next year," he said.

Optimistic on growth

The program is based on an average growth projection of 2.75 percent for the next four years, which some experts say is optimistic.

Irish Prime Minister Brian Cowen
Cowen could have a tough time selling his budget to the oppositionImage: AP

"It's certainly challenging, given the extent of fiscal tightening, which is around 10 percent of GDP," Grant Lewis, Head of Economic Research at Daiwa Capital Markets Europe told Deutsche Welle.

"But I think, the EU and the IMF will sign up for that, as in the last 15 years, Ireland has had a good track record in terms of growth, it's a flexible economy with a well-educated workforce and good demographics."

Measures include reducing the minimum wage by one euro, slashing public sector jobs and pay and raising the sales tax from 21 percent to 23 percent in 2014.

Under the current tax regime, 45 percent of Irish workers do not pay income tax, a situation the government calls "unsustainable".

The EU's Commissioner for Economic and Financial Affairs, Olli Rehn, welcomed the program, calling it "a sound basis for the negotiations" on the international bailout.

Corporation tax non-negotiable

One tax that will not be raised is Ireland's corporation tax - at 12.5 percent the lowest in the European Union.

Bank of Ireland branch
The banking sector is at the heart of the debt crisis.Image: picture-alliance/ dpa

"The government remains committed to the 12.5 percent corporation tax rate: it will not be increased under any circumstances," was the clear message in Wednesday's statement.

It was a magnet for foreign investment during Ireland's boom years, but has been heavily criticized by its European neighbors. Countries like Germany say it creates an unfair advantage, especially while Ireland is drip-fed by EU bailout funds.

"It's the heart of Ireland's business model and it's attracted loads of multinationals. Germany and France as Europe's biggest economies have massive advantages compared to Ireland, so its low corporation tax shouldn't matter so much," Lewis said.

Banking sector recovery crucial

Years of economic growth in Ireland, fueled by a property boom and reckless lending practices, turned to bust when the housing market collapsed, exacerbated by the global financial crisis.

Ireland is set to take a majority stake of up to 80 percent in top lender Bank of Ireland that could leave the state with effective control of the country's top three banks. Allied Irish Banks could join the Anglo-Irish Bank in being fully nationalized.

Lewis believes the Irish government may have to do more further down the line. "The banking sector is the great unknown, it has broken Ireland's back, we'll have to see how the measures for the banking sector pan out," Lewis told Deutsche Welle.

Author: Nicole Goebel
Editor: Chuck Penfold