Irish to Detail Deficit Plan as Government Wobbles During Race for Bailout

Ireland’s Finance Minister Brian Lenihan will today lay out a four-year deficit-cutting program that his party may not be around to deliver, as the government’s majority evaporates and a bailout approaches.

Welfare cuts of 800 million euros ($1.1 billion) are among the steps planned to narrow the deficit to 3 percent of gross domestic product by the end of 2014, said a person familiar with the matter who declined to be identified because the plan is not yet public. The shortfall will be 12 percent of GDP this year, or 32 percent when the costs of a banking rescue are included.

The program will be published as the government races to finish talks on aid with the International Monetary Fund and the European Union. Lenihan’s coalition partners in the Green Party said two days ago that they will quit the government next month and independent lawmakers are threatening to block the 2011 budget, the first step in the four-year plan.

“The government’s days are numbered,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “What we are likely to see in the next fortnight is growing pressures on the opposition parties to abstain on the major votes and pass the budget for the sake of political stability.”

Election Call

The biggest opposition parties, Fine Gael and Labour, say they want an election now because the government won’t survive to deliver on the plan. Prime Minister Brian Cowen said Nov. 22 he will hold national elections in early 2011 after first trying to win backing for the budget. Support for his Fianna Fail party, which has governed Ireland since 1997, dropped to a record low this month, a poll in the Sunday Business Post on Nov. 21 showed.

While the opposition backs the aim of reducing the deficit to the EU’s 3 percent limit by 2014, labor unions are planning “mass mobilization” in protest at the planned cuts, with a march in Dublin on Nov. 27.

“It appears that the day of reckoning has arrived,” said David Begg, head of the Dublin-based Irish Congress of Trade Unions, the umbrella group for unions, which is organizing the demonstration. “The Barbarians are at the gates.”

Standard & Poor’s today lowered its long-term credit rating for Ireland by two steps, to A, the sixth-highest grade, and warned that another downgrade is possible should the 2011 budget “fail to staunch wholesale funding outflows.”

Tax Rate

The government plans to cut the minimum wage, currently 8.65 euros an hour, by 12 percent, said the person familiar with the package to be announced. Lenihan will maintain Ireland’s 12.5 percent corporate tax rate, criticized by some European governments, as a pillar of national policy, said the person.

The plan may include 10 billion euros of spending cuts and 5 billion euros of tax increases, the Irish Times yesterday cited Alan Ahearne, an adviser to Lenihan, as saying.

The government relies on support from independent lawmakers Michael Lowry and Jackie Healy-Rae, who said this week they may withdraw their backing for the budget. Should Fianna Fail lose a special election for the Irish parliamentary seat of Donegal Southwest tomorrow, Lenihan may be forced to rely on opposition votes to pass the budget.

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened 45 basis points to 589 basis points yesterday on concern that the budget may not pass and the government will fall. The yield spread reached a record 652 basis points on Nov. 11.

European Union Economic and Monetary Affairs Commissioner Olli Rehn said yesterday it’s essential that Ireland passes the 2011 budget “sooner rather than later.”

“Let’s get it out of the way and move on,” he said in remarks broadcast by Dublin-based RTE.

To contact the reporters on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net.

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