Ireland unveils drastic measures to tide over recession

In an emergency budget revealed in parliament yesterday Irish finance minister Brian Lenihan outlined a series of severe measures to counter the financial crisis that  engulfed the country since last year.

The steps include reforms in the banking system, transfer of toxic assets to a new National Asset Management Agency, substantial hikes in income tax and stringent spending cuts.

This emergency budget is the fourth attempt since last July to cut government deficit. It forecasts 7.7 per cent contraction in gross domestic product (GDP) this year against the 6.75 per cent predicted earlier, and another decline of 2.9 per cent in 2010 before seeing a growth of 2.7 per cent in 2011.

Unemployment has soared to 11 per cent from 6.2 per cent in 2008.

Lenihan said, "we are a small open economy with a huge exposure to international economic trends. Our confidence, our finances, our exports and our banks have been dented."

While introducing the austerity measures to trim €3.25 billion ($4.3 billion) from the inflating deficit this year which is the worst in the euro zone, he warned that the country's expenditure base is too high and the revenue base is too low.

Ireland's projected tax revenue this year is much lower at €34 billion compared to €41 billion collected in 2008 and €47.8 billion in 2007, due to the slump in property and construction markets on which the country heavily relied on.

The minister said it is no longer possible to keep minimum wage earners outside the tax system and he wanted to widen the base in a fair manner. Presently, incomes are taxed at lower rates compared to European norms.

Announcing the changes to the income levies, Lenihan said levies on income will be increasing progressively on higher salaries. It will be doubled to 2 per cent to the minimum wage category, 4 per cent to the next category and 9 per cent to the high end category to yield an extra €1.3 billion this year.

"Those who have most must give most," the minister said.

Series of cuts announced include 10 per cent cut in expenses, moderations in pensions, long service payments and job-seekers allowance and reduction in rent supplement scheme.

The minister said this year's government deficit could have hit 12.5 per cent of GDP but with the new remedial measures it is now expected to be 10.75 per cent. He hoped that Ireland would be able to achieve the euro zone norm of 3 per cent deficit by 2013.

In the banking system, the minister said that the role of the Central Bank of Ireland will be reformed to place it in the center of financial supervision and will be headed by a commission chaired by the governor.

Toxic assets in the banking sector worth €80 to €90 billion will be transferred to a National Asset Management Agency which will pay significantly less reflecting the decline in their values.

This will be done "with the purpose of ensuring that banks have a clean bill of health, their balance sheets are strengthened and uncertainty over bad debts is reduced." Lenihan said.

''All borrowers will be required to meet their full legal obligations for repayment. There will be a hardening of the approach to these borrowers – taxpayer's money is at stake, and the Agency will be expected to protect it in a commercial way and with an independent remit,'' Lenihan added.

On expectation of the government's rescue plans, banking stocks gained ground on Tuesday. Shares of Irish Bank jumped by about 15 per cent while Bank of Ireland rose by 9 per cent.