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Ireland Raises Taxes, Cuts Spending to Narrow Deficit

Irish Finance Minister Brian Lenihan poses for photographs holding the Irish 2011 budget document at the government buildings in Dublin. Photographer: Aidan Crawley/Bloomberg
Irish Finance Minister Brian Lenihan poses for photographs holding the Irish 2011 budget document at the government buildings in Dublin. Photographer: Aidan Crawley/Bloomberg

Dec. 7 (Bloomberg) -- Irish Finance Minister Brian Lenihan cut spending and raised taxes by 6 billion euros ($8 billion) to deal with what he called the “worst crisis in our history” as the government seeks to seal an international aid package.

Lawmakers will begin voting on the measures, including cuts in child payments, tax credits and some unemployment benefits, in parliament in Dublin from about 7 p.m. today. Prime Minister Brian Cowen has the support of 82 lawmakers in the parliament compared with 80 for the opposition, including independents.

“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.

The government is under pressure to pass the budget to secure the 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 late yesterday 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’

The budget is the fourth since October 2008 and adds to measures of about 14 billion euros as the government seeks to reduce the country’s 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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