Irish Lawmakers Back First of 2011 ‘Crisis’ Budget Measures

Irish Finance Minister Brian Lenihan won the backing of lawmakers in the first vote on his 6 billion- euro budget ($8 billion) to deal with what he called the “worst crisis in our history.”

Lawmakers voted by 82 to 77 in the parliament in Dublin today to back increases in levies on petrol and diesel. The ballot was the first on spending and taxation for 2011 and voting on other resolutions is due to finish before midnight.

“This has been a traumatic and worrying time,” Lenihan said, as he announced reductions to public-sector pensions and government salaries, including a 14,000-a-year cut for the prime minister. Ireland needs external support “to break the vicious cycle that has threatened our national finances and our banking system since the second quarter of the year,” he said.

Prime Minister Brian Cowen’s government is under pressure to pass the budget to secure an 85 billion-euro aid package as spending cuts threaten to prolong a slump that has seen the economy shrink 11 percent over the past three years. While investors remain concerned about contagion and governments’ ability to push down deficits, European finance ministers have ruled out immediate financial support to Portugal and Spain.

“It’s going to be a grind to get domestic demand growth in the short term,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin. “It is in everybody’s interest to get this budget out of the way, get all the votes passed.”

‘Unavoidable’

After today, the government faces at least three more votes, including a separate ballot on cuts to welfare payments, before the entire budget is approved.

The budget is the fourth since October 2008 and adds to austerity measures of about 14 billion euros as the government seeks to reduce the deficit. Lenihan said he’ll cut the salaries of government ministers by 10,000 euros and cap state salaries at 250,000 euros. Internet gambling will be taxed, and child benefit payments will be cut by 10 euros per child.

A 10 percent reduction in employees’ tax credits will increase their income-tax payments.

“Over the next four years, further reductions in social welfare spending are unavoidable if we are to reduce the budget deficit,” Lenihan said. “Everybody pays, and those who can pay most, will pay most.”

Ireland agreed on the aid package with the European Union and the International Monetary Fund on Nov. 28 after its borrowing costs soared on investor concern the cost of rescuing lenders including Anglo Irish Bank Corp. would swamp the state. About 35 billion euros of the aid is earmarked for the country’s banks, with the remainder for the state.

Four-Year Plan

Irish bonds have risen in the past week, narrowing the extra yield investors demand to hold Irish 10-year bonds over German bunds, Europe’s benchmark, to 509 basis points from a euro-era record 680 basis points on Nov. 30. That’s still almost 10 times its average over the last decade.

The 2011 budget is part of a four-year plan the government announced last month to reduce its deficit to the EU limit of 3 percent of gross domestic product. The shortfall will be about 12 percent of GDP this year, or 32 percent when the cost of the bank rescue are included.

“We have a budget deficit problem and there has to be immediate painful adjustments to deal with it. Nonetheless I still maintain our biggest problem is an anemic recovery,” said Joan Burton, finance spokeswoman for the opposition Labour party. “Unless we’re careful, budget-deficit mania may further slow economic growth and destroy confidence -- thereby making future debts even less manageable.”

To contact the reporters on this story: 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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