Ireland Announces Billions in Spending Cuts

In order to secure an international bailout, the Irish plan a combination of spending cuts and tax hikes.

The Irish government announced a combination of deep spending cuts and steep tax increases on Wednesday in order to rein in deficit spending and secure a bailout from other eurozone states.

Ireland is currently borrowing nearly one out of every three euros its government spends. According to Prime Minister Brian Cowen, it is high time that the country confronts this challenge. “The size of the crisis means no one can be sheltered from the contribution that has to be made,” he said.

The Irish face €15 billion in spending cuts over the next four years. Welfare provisions, which are among the most generous in Europe, will be subject to some 15 percent in cutbacks while public-sector salaries will be reduced by 10 percent. At the same time the government intends to bring down unemployment from 13.6 percent today to no more than 10 percent four years from now. According to the plans, its budget deficit should amount to no more than 9.1 percent of GDP by next year.

Ireland has been bracing for spending cuts for several months. In the wake of the financial meltdown the former Celtic Tiger plunged deep in the red, saving two of the country’s largest banks from bankruptcy with a multibillion euro bailout effort.

Fearful that a crisis in Ireland could spill over to other highly indebted eurozone members, including Portugal and Spain, Cowen’s government accepted a rescue package from the European Union and the International Monetary Fund this weekend worth €85 billion in loan guarantees. In return, Ireland has to cut spending and raise taxes.

The government has pledged to maintain the corporate tax rate at 12.5 percent, the lowest in the eurozone, which has helped to lure companies as Intel, Microsoft and Pfizer to set up operations in the country. Opposition parties, though adamantly opposed to the European rescue package, agree that this low corporate tax regime is quintessential to Ireland’s future recovery. Multinational companies employ nearly one out of every seven workers in Ireland.

The income tax will be reformed instead in order to raise an additional €1.9 billion in revenues. The value-added tax rate will increase with 1 percentage point in 2013.