Lenihan Raises Ireland's Taxes to Help Break `Vicious Cycle' of Deficits

Irish Finance Minister Brian Lenihan will outline 6 billion euros ($8 billion) worth of spending cuts and tax increases today, seeking to seal an international bailout to rescue the state’s finances and banks.

Lenihan will lay out the 2011 budget in parliament in Dublin at 3:45 p.m., adding to measures of about 14 billion euros over the last two years. The European Union has given Ireland until 2015 to reduce its budget deficit to 3 percent of gross domestic product from about 12 percent of GDP this year.

The budget must pass for Ireland to secure the 85 billion- euro aid package it sought from the EU and International Monetary Fund last month. The government is likely to win approval for the austerity measures after independent lawmaker Michael Lowry said late yesterday he will support the budget in a vote in parliament.

“My sense is that there is a desire just to get the budget out of the way,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin in an interview. “It’s likely that it will be passed but there’s a chance of political risk developing” after an election early next year.

Prime Minister Brian Cowen has said he will hold national elections as early as February, once he’s secured support for the budget. Support for his Fianna Fail party plunged to 13 percent, the Sun newspaper reported on Dec. 2, citing a survey of 1,000 people. Fine Gael was at 32 percent, Labour had 24 percent and Sinn Fein stood at 16 percent, the paper said.

Photographer: Crispin Rodwell/Bloomberg

Irish Finance Minister Brian Lenihan. Close

Irish Finance Minister Brian Lenihan.

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Photographer: Crispin Rodwell/Bloomberg

Irish Finance Minister Brian Lenihan.

Bailout

Ireland sought the bailout as European leaders put pressure on the government to accept a package to prevent contagion spreading to countries such as Portugal and Spain. The extra yield investors demand to hold Irish 10-year bonds over German bunds, Europe’s benchmark, was at 534 basis points as of 8:07 a.m., compared with a record 680 basis points on Nov. 30.

The premium on Portuguese debt has fallen to 306 basis points from a Nov. 11 record of 484 points, while Spain’s has dropped to 228 points from 298 points on Nov. 30.

Lenihan will cut spending on everything from welfare to roads by about 4 billion euros in 2011, according the government’s four-year plan to reduce the deficit, published on Nov. 24. Tax increases will raise about 2 billion euros.

The Irish Times reported today that Cowen will take a 14,000-euro pay cut and the government will dispose of one of its two jets. Most social welfare payments will be cut by about 5 percent, child-benefit payments will be lowered and income-tax credits will fall about 10 percent, the newspaper said, citing unidentified sources.

Parliament Support

Irish lawmakers will begin voting on some of the budget measures from 7 p.m. in parliament, including levies on alcohol and tobacco. At least three other related pieces of legislation will be voted on within four months.

Cowen has the support of 82 lawmakers in the parliament compared with 80 for the opposition, including independents. Lucinda Creighton, a lawmaker with Fine Gael, the biggest opposition party, may abstain and let the budget pass if needed, the Sunday Business Post reported on Dec. 5.

“I believe the budget will pass,” John Bruton, a former leader of Fine Gael, said in an interview in Dubai yesterday. People “may have arguments about the detail of the financial package and the plan to narrow the deficit. It’s only about the detail, not about the scale of the work to be done.”

Labour leader Eamon Gilmore, who last week described the EU-IMF aid package as a “national sell-out,” said he won’t be bound by the agreement after an election.

Under the government’s four-year program, spending cuts and tax increases of amount 6.7 billion euros will be made in 2012 and 2013. The minimum wage will be cut and the government won’t renege on payments to holders of senior-bank debt even after it pumps as much as 83 billion euros into the financial system.

“Labour has said it will seek to reopen the deal with the IMF and the EU, and the IMF generally don’t like to renegotiate,” said Goodbody’s O’Leary. “In a worst case scenario, we could see some friction between ourselves and our lenders.”

To contact the reporters on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net Finbarr Flynn in Dublin at fflynn3@bloomberg.net;

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

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