THE Irish government today released a four-year austerity plan described as “draconian” and “staggeringly austere” by analysts, with €15bn (£12.6bn) of budget cuts planned by 2014.
But the measures failed to placate the markets, where Irish bond yields continued to rise on fears that the government will be unable to get the cuts through parliament: 10-year yields jumped to 8.9 per cent, just short of the highs they reached before Ireland announced its intention to apply for a bailout.
The cost of insuring Irish debt also rose, with credit default swaps rising by 16 basis points (bps) to 595bps, meaning it now costs €595,000 to insure €10m’s worth of debt.
Economists welcomed the depth of the cuts but were sceptical about the plan’s growth forecasts: it predicts an average growth rate of 2.75 per cent over the next three years despite a likely contraction in the economy during 2010.
People immediately took to the streets to protest against the plans, which would come on top of €15bn of cuts already made. The new cuts involve slashing Ireland’s minimum wage – one of the highest in Europe – by one euro to €7.65, reducing the public sector payroll by 24,750 and cutting wages for new hires by 10 per cent. Welfare payments will also be reduced by €2.8bn.
Overall, the plan makes €7bn’s worth of cuts in services, €3bn in capital expenditure and makes up the rest with €5bn of tax rises. The cuts are to be front-loaded, with €4.5bn of cuts and €1.5bn of tax rises to come in 2011.
However, the tax changes do not include any rise in the country’s flagship 12.5 per cent corporation tax rate – one of the lowest in Europe. Instead, the government proposes raising VAT to 23 per cent over three years (from 21 per cent now), reducing the value of income tax credits and tax bands by 16.5 per cent and doubling its carbon tax to €30 per tonne.
Irish Prime Minister Brian Cowen, who yesterday confirmed the EU/IMF bailout would be €85bn said: “The size of the crisis means that no one will be sheltered from the contribution that has to be made towards national recovery.”
But with two independent MPs defecting from the government coalition this week, Cowen is short of the votes needed to pass the package.
And even if it passes, it does not address the insolvency of the country’s banking system. Commerzbank’s Peter Dixon said: “The underlying problem of the massive hole in banking sector balance sheets is yet to be tackled.”