Ireland Faces 'Challenge of Its Life'

Income levies were the main point of the budget, unveiled by finance minister Brian Lenihan, with a doubling of the rates introduced in autumn last year and a lowering of the thresholds of when they apply.

The country's low corporate tax (12.5%—one of the main reasons for Ireland's phenomenal economic growth in recent years—will remain the same but capital gains and capital acquisitions tax have been raised to 25 percent.

Mr Lenihan said the measures mean a new budget deficit target of 10.75 percent of GDP for this year, with previous forecasts predicting that the deficit would clock in at almost 13 percent, over four times the limit allowed under the eurozone rules.

The European Commission has given Ireland until 2013 to get its finances in order, which means bringing the budget deficit down to 3 percent or less.

"We are now facing the challenge of this nation's life," Brian Lenihan told parliament, with the budget described in Irish newspapers as being the harshest in living memory.

"The problem is our expenditure base is too high and our revenue base is too low. If we fail, refuse or neglect to address this structural problem we will condemn our generation and the next to the folly of excessive borrowing," Mr Lenihan said.

The minister said that in 2010 he would look for a further 1.75 billion euros from taxation and another 1.5 billion euros the following year.

Getting this extra revenue could take the form of property tax, a carbon tax or taxation of child benefits.

"We have to change the way we operate as a country and we cannot let it sap our confidence," said prime minister Brian Cowen, speaking after the budget was revealed.

"This recession will pass and the world will recover. The consensus is that the world economy will recover in 2010. That will bring a return of growth in Ireland in 2011," he added.

Dublin also plans to set up an asset management agency to buy bank's bad debts in a bid to restore international confidence in the country's finance sector.

Having ridden high for so many years, Ireland's small open economy has been strongly hit by the global financial crisis which punctured the property bubble and left the country facing double digit unemployment figures and a sharp contraction in economic growth and consumer spending.

Its problems and how it deals with them are being closely followed in the rest of Europe, particularly Brussels.

Ireland's announcement came the same day as new figures showed that the eurozone economy shrank by 1.6 percent in the last three months of 2008, instead of the 1.5 percent contraction that had been predicted.

The drop in GDP came as a result of falling exports and lower investment.

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