Ireland plans €6bn budget cuts for 2011

City A.M. Reporter

AND is planning to push through spending cuts and tax hikes totalling €6bn (£5.2bn) next year, the toughest budget in the country’s history, in a last-ditch effort to convince investors it is not on the verge of financial meltdown.

With Irish borrowing costs breaching record highs every day this week, finance minister Brian Lenihan is battling to turn the tide of market opinion and avoid the risk of a Greek-style bailout.

He said yesterday he was frontloading next year some 40 per cent of the €15bn in adjustments he is targeting between now and 2014, the deadline he has promised Brussels to get the worst budget deficit in Europe back within EU limits.

“I am well aware that such measures will impact on the living standards of everybody,” Lenihan said in a statement. “But our spending and revenue must be more closely aligned. This is the only way to ensure the future economic well-being of our society.”

Lenihan got a vote of confidence from European Central Bank president Jean-Claude Trichet, who said Ireland’s plans to cut the deficit by €15bn over the next four years should be sufficient to solve its debt crunch.

“The €15bn ... are not in our view insufficient but of course you have to be alert permanently and stand ready to do all that is needed,” Trichet said.

Ireland’s finance ministry said it expected the measures, which will be fleshed out in a four-year plan later this month, would cut the deficit to 9.25 to 9.5 per cent of GDP next year and to 2.75 to 3 per cent of GDP in 2014. The shortfall is set to blow out to a jaw-dropping 32 per cent of GDP this year due to the one-off inclusion of a mammoth bill for bailing out its banks. Even excluding the bank bill, the deficit will be nearly 12 per cent of GDP this year.

Lenihan is hoping his fiscal measures will reassure investors and reduce Irish borrowing costs enabling the country to tap bond markets again in January. If yields do not come down by then, the government may be forced to seek external assistance. The premium investors demand to hold Irish bonds over benchmark German bunds stayed at a fresh peak of 543 points after the budget forecasts were unveiled.