Ireland unveils emergency budget

Six steps to Irish economic recovery

The Irish Republic has unveiled its second budget in six months to deal with its rapidly contracting economy.

The emergency budget includes a large rise in taxes and a cut in spending, to deal with Ireland's budget deficit.

Finance Minister Brian Lenihan also said an independent agency would take over banks' bad assets to try and restore lending.

His forecast for 2009 was also revised down sharply. He expects it to contract by 8% this year, down from 3% in 2008.

'House in order'

Dublin is having to deal with a deepening recession while being forced to correct the worst deficit in Europe.

The first lesson is that, if you're lurching further and further into debt, there comes a point when fiscal stimulus isn't very stimulating at all Stephanie Flanders, BBC economics editor Ireland's stimulus plan

The total reduction in gross government spending for 2009 will total 1.8bn euros Mr Lenihan said, while further savings of 4.8bn euros will be required between 2010 to 2011.

"First, and most urgent, we must stabilise our public finances. Until we show that we can put our own house in order, we cannot expect those who have invested here and who might invest here in the future to have confidence in us," said Mr Lenihan.

BBC economics editor Stephanie Flanders explained that: "There's method to his madness. And also some lessons for the UK."

"The first lesson is that, if you're lurching further and further into debt, there comes a point when fiscal stimulus isn't very stimulating at all."

The latest move in Ireland is in contrast to other nations which have been increasing spending and lowering taxes to encourage economic revival.

Open economy

The finance minister said the key aims of the budget include:

• Putting the public finances in order

• Restoring the damaged banking system and restoring credit

• Regaining competitiveness, increasing exports and driving down costs

• Protecting jobs and improving investment in training

• Restoring Ireland's reputation abroad.

The Republic had relied too heavily on the housing sector, which had proved to be a bubble, Mr Lenihan said.

But speaking before the Dail, Brian Lenihan said it would be wrong to assume that it was only the collapse in the housing and construction sector which was to blame for the Republic's recession.

It had been especially hard hit due to the nature of Ireland's small and open economy, he said.

Any future economic recovery would have to be based on a revival in exports.

'Bad assets agency'

The Irish budget will try and tackle record unemployment

Looking ahead, Mr Lenihan lowered his forecast for economic growth, saying the economy was likely to contract by 8% in 2009, more than a recent forecast of 6.75% and significantly higher than the 3% contraction experienced in 2008.

He said this change marked "a serious decline in national living standards: the sharpest fall on record. Forecasts for 2010 are not as severe".

In light of the deterioration in the finance sector, Ireland will become one of the first countries to establish an agency to take over toxic assets from banks.

This, the finance minister said, would help give banks a "clean bill of health", reduce uncertainty in the system and try to get credit flowing again to businesses and individuals.

Taxes

As for taxes, he reiterated that those earning the most should pay the most.

"With up to 40% of income earners paying no income tax at all, we can no longer meet our fiscal needs."

"The challenge is to spread the burden in a fair manner to a wider range of income earners while avoiding economic disincentive effects," said Mr Lenihan.

The rates of the income levy - which is a way of raising taxes in the middle of the tax year - will double while the threshold at which each begins will be lowered.

The new rates will be 2%, 4% and 6%, and the new thresholds will be 15,028 euros, 75,036 and 174,980 euros respectively.

Mr Lenihan said tax on cigarettes would rise by 25 cents per packet but there would be no increase in duty on alcohol or petrol as he was concerned any rise would lead to a loss of revenue.

And the rates of Capital Gains Tax and Capital Acquisitions Tax is being increased 25%, effective immediately.

Public sector

He said pay in the public sector, which represents a large part of the Irish economy, had to be reassessed. At the highest level it had become overinflated in recent years and needed to be reduced.

"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."

A review of top level pay rates is being launched "to take account of the changed budgetary and economic circumstances, and the changed private sector pay."

Such changes would include reductions in ministerial pensions and expenses arrangements.