MARKETS remain unconvinced that the Irish government will be able to pass the €15bn (£12.6bn) cuts programme it unveiled yesterday, with Prime Minister Brian Cowen lacking the votes needed to get the measures through parliament.
Cowen’s government is already teetering, with the Green Party this week demanding an immediate election once the emergency budget is passed. But the coalition, which had a majority of three, has lost the support of two independent MPs who promised to vote against the 2011 due to be published on 7 December.
The cuts programme is unavoidably controversial: it slashes Ireland’s high minimum wage by one euro to €7.65 and promises to cut the public sector payroll by 24,750 back to 2005 levels. The welfare budget is to be docked €2.8bn while university tuition fees are to rise.
The president of the Irish congress of trade unions, Jack O’Connor, claimed yesterday that the government is “exploiting this devastating catastrophe to re-engineer our economy and society according to an even crueller blueprint which more effectively reflects their interests”.
In addition, the public will have to pay more for most goods thanks to a two per cent VAT rise to be phased in over three years. Income tax bands and tax credits will also be re-jigged to be less generous to the tune of 16.5 per cent, while the carbon tax will double, pension levies will rise and a new local services tax will be introduced.
All in all, the plan is to make €7bn of services cuts, €3bn in capital expenditure reductions and €5bn in tax rises. The government aims to front-load the budget adjustment, saying that its emergency budget for 2011 will make €4.5bn of cuts and €1.5bn of tax rises.
But economists have voiced scepticism over the government’s growth forecasts:?it predicts an average GDP?expansion of 2.75 per cent 2011-2014, despite the likelihood that Irish economy shrank this year.
And the budget cuts are seen as all the more unpalatable because they come on top of €15bn of budget cuts already made.
Nomura political analyst Alastair Newton said the programme would “probably” pass because “the Irish are resigned to their circumstances, albeit coupled with enormous resentment of the political classes”.
The cost of insuring Irish sovereign debt continued upwards yesterday on political fears, with credit default swaps (CDS) rising by 16 basis points to 595bps (a cost of €595,000 to insure €10m of debt). The cost of state borrowing also rose: Irish 10-year bond yields hit 8.9 per cent yesterday.