Ireland laid out plans to narrow its budget deficit as voters braced for a fourth year of austerity amid concerns that the future of the euro may be in jeopardy.
Health, education and welfare spending will bear the brunt of about 2.2 billion euros ($2.9 billion) of cuts, Expenditure Minister Brendan Howlin said today. Public spending will fall about 10 percent to just under 52 billion euros between 2011 and 2014, he said. Finance Minister Michael Noonan is scheduled to outline about 1.6 billion euros of tax increases tomorrow.
“Twelve months ago we were Europe’s problem,” Howlin told lawmakers in parliament in Dublin. “Now problems in the European and global economy threaten our recovery.”
The government is pursuing more cuts as it tries to convince investors that measures worth 20 percent of the economy are enough to win a return to the debt market by 2013 as the euro crisis escalates. In the background, yields on Irish bonds have risen while savers are seeking safety as the topic of euro demise hits the mainstream airwaves in Dublin.
German Chancellor Angela Merkel and French President Nicolas Sarkozy today said they wanted to rewrite the European Union’s governing treaties to tighten economic cooperation as a first step to ending the debt crisis.
“There is a genuine fear about euro breakup and what might happen,” said Pramit Ghose, head of asset management at Bloxham Stockbrokers, whose fund holding Finnish and Dutch euro-denominated bonds has taken in 2.5 million euros in the last two weeks. “I’ve told clients there is little enough yield, but they don’t care, they just want safety.”
Irish bonds due in 2020 yielded 9.15 percent, up from 8.24 percent a month earlier as they dropped in price. Comparable Dutch debt maturing in 2021 yielded 2.60 percent, an increase from 2.26 percent over the same period. The year-on-year rate of inflation in Ireland was 2.8 percent in October.
Ireland was forced to seek an international bailout last year, as its banking problems became too big to handle alone and its fiscal deficit widened. Howlin said the government’s decisions this week will cut public spending to a limit of 52 billion euros in 2014 from 55.8 billion euros next year.
While weekly social welfare payments won’t change, fuel allowance will be cut and adjustments to one-parent family payments will save 20.7 million euros, he said. An increase in contributions by students toward college fees will save 18.5 million euros. About 6,000 government jobs will go.
“The biggest problem with Budget 2012 is that it won’t work,” said Jack O’Connor, president of the country’s largest union, SIPTU. The government can’t take the spending measures “without further depressing economic activity, no matter what way it is done,” he said in a statement.
The budget in Ireland is being delivered against the backdrop of escalating concern about the future of the euro. Irish Prime Minister Enda Kenny said European leaders must make and implement “clear decisions” this week.
“Otherwise, international confidence and investment in Europe will continue to fall,” he said in a televised speech to the nation before the budget.
An edition of Liveline, a radio show from national broadcaster RTE and among the most popular in the country, last week was dominated by worried savers asking how to open dollar accounts to protect their money. The government sought to calm fears of a return to Ireland’s old currency.
“We don’t have printing presses printing up worthless punts right now and we don’t intend to have that,” European Affairs Minister Lucinda Creighton told lawmakers on Nov. 29. “Bottom line is that we cannot allow our currency to fail, Germany cannot allow for our currency to fail, nor can France.”
Dublin-based Bloxham started its fund at the beginning of November and it now has assets of about 11 million euros, Ghose said by telephone on Dec. 2. It also holds U.S. Treasuries and U.K. government bonds, whose yields have fallen to records over the past month on concern about the euro region.
“This is their running-away money, just in the case the Irish euro somehow becomes worth less,” Ghose said.
Paddy Power Plc, the country’s largest bookmaker, has begun offering odds on euro breakup and has taken about 215 bets, according to Ken Robertson, a spokesman for the Dublin-based company. Most punters are backing Ireland to be still using the euro by 2015 at 1 to 4, though the largest bet is a 100-euro wager on an unraveling of the euro region, he said.
Germany and France are mooting closer economic and budgetary ties. Sarkozy said today that, together with Merkel, he’d back automatic penalties for deficit violators, a European monetary fund and monthly summit meetings.
The Irish government refuses to countenance any talk of a breakup, and instead is continuing austerity to prove its credentials as a euro member. Spending cuts and tax increases will amount to about 33 billion euros between 2008 and 2015.
Since 2008, the economy has shrunk about 15 percent. Some 448,000 people are now jobless, translating into a 14.5 percent unemployment rate, up from 4.8 percent in 2007.
With tax revenue plunging and welfare spending surging, the previous Fianna Fail-led government started making cuts in 2008. Since then, the take-home pay of a one-income family on the average industrial wage of 35,000 euros is now 423 euros a month less, the Irish Tax Institute said in November.
Sales tax will be raised by two percentage points to 23 percent in 2012, Finance Minister Noonan has said. The government will increase motor taxes and is considering lifting tax on dividends and rental income, as it seeks to cut the fiscal deficit to 3 percent of gross domestic product by 2015. The shortfall this year will be about 10 percent.
“The capacity for people to bear more pain is running out as we approach an overall tipping point in terms of the money that can be taken from them in tax,” said Bernard Doherty, president of the institute, which represents accountants and lawyers dealing with taxation.
-- With assistance from Joe Brennan and Finbarr Flynn in Dublin. Editors: Rodney Jefferson, Fergal O’Brien