Page last updated at 21:52 GMT, Friday, 21 August 2009 22:52 UK

Taxing times for Ireland's economy

Russell Padmore
Business reporter, BBC World Service

Dublin City, Repubic of Ireland
Dublin has lost its status as a European city of economic success

There is an old expression about Ireland's weather that you get all four seasons in one day. However, September looks like it will be a stormy month for the government.

The once vibrant Irish economy is in dire trouble and the government's remedy of increasing taxes and setting up a body to take over bad debts from the banks is creating divisions between Fianna Fail and its junior coalition partner, the Green Party.

The controversial rescue plan for the banks, creating a National Assets Management Agency (NAMA) to buy their bad debts, could bring down the government, forcing an election.

Senator Dan Boyle, Green Party

There can be no holding back describing the treachery [bankers'] actions have brought about

Senator Dan Boyle, Green Party

Ireland's banks took too many risks at the height of a boom in construction, financing builders who are now unable to repay their loans.

However, the banks are frightened to foreclose on many of these loans and seize the collateral put up for them, because the project they financed has dropped in value.

Divided parties

The Green Party will hold a special convention in October to debate the strategy of NAMA but the governing partners could be divorced before then.

The Greens are reluctant to step in behind the government's plan for NAMA to take the bad loans off the banks. Senator Dan Boyle has described the behaviour of bankers as "economic treason", signalling a reluctance to rescue them.

"There can be no holding back in describing the treachery that their actions have brought about in shaming this country and undermining our economic well-being," he said.

Irish voters delivered a huge blow to the Greens at the recent European elections and the party is wary of appearing to support the government's controversial policies without question.

Mountain goats omen

I recall an old Irish expression my grandmother from Derry used to say about troubled partnerships: "two goats pulling on a mountain". The message being that neither of the tethered animals win.

a goat
A goat is crowned as king at the Puck Fair in Killorglin

The annual Puck Fair, held every August in Killorglin in the west of Ireland, is famous for its goat mascot.

This year's "Puck" goat Billy made national news, because he is the first animal from outside County Kerry in more than 400 years to be made mascot. Could that be an omen for the Irish government to heed my grandmother's words?

The two big economies in the eurozone, France and Germany, have emerged from recession, but for the Irish that prospect is a long way off.

'Lagging behind'

Rob Dobson, a senior economist at Markit, told me the latest Irish data for the end of July looks bleak. "Manufacturing and construction show sharp rates of contraction. Ireland is lagging quite far behind the rest of the eurozone as a whole," he said.

Ireland certainly faces challenges, but economists are increasingly saying the worst is over.

Austin Hughes, the chief economist at the Irish arm of Belgium's KBC bank, told me he sees mixed signals, but Ireland is "past the worst". He believes there are still significant risks but "draconian measures will be sufficient to turn the economy around".

Taxes up

Recession has thrown the Irish government's spending plans into a crisis and to balance the books taxes will have to be increased and social welfare payments cut.

The news is still bad, but not appallingly bad

Austin Hughes, chief economist, KBC Ireland

Irish pensioners could be in the firing line for cuts in their weekly payments and the growing ranks of the unemployed could suffer with reduced allowances for those seeking a job.

The government's cabinet will consider a key report on what cuts, or tax increases, to make in the coming days.

The vulnerable in society could find their euro is not buying what it used to and the politicians could face the brunt of that unhappiness.

Lisbon Treaty referendum

Astute politicians, who are enjoying the last days of summer, are not only on election alert, but preparing for a second referendum on the European Union's Lisbon Treaty in October.

Taoiseach Brian Cowen
Taoiseach Brian Cowen faces a tough economic challenge

The Irish are the only EU country to hold a referendum on the treaty, which is key to Europe's future. When they rejected Lisbon the first time, the renowned "Celtic Tiger" economy was in very good health, but now it is on life support.

With one in ten of the workforce unemployed, Irish voters will not want to upset the suits in Brussels who control the EU purse strings.

As KBC Ireland's Austin Hughes put it to me: "The news is still bad, but not appallingly bad."

Political maneouvres

The politicians at EU headquarters in Brussels have been quiet about Ireland's economic plight, demonstrating an obvious desire not to interfere with the Lisbon Treaty vote. Then again the corridors of power in Brussels can be deserted in August.

Ireland's Taoiseach, or prime minister, Brian Cowen, faces a tough challenge in keeping his coalition government together by preventing the Green Party walking away from their partnership with Fianna Fail.

The Irish-American Thomas "Tip" O'Neill, a former Speaker of the House in the US Congress, once declared, "All politics is local."

As September approaches, Ireland's politicians are away from the Dail, the Parliament in Dublin, facing difficult questions from their local voters. They will spend a long time explaining the strategy of NAMA.

The quandary of the National Assets Management Agency paying too much for troubled assets at the expense of taxpayers or paying too little and hurting the banks remains a valid question.

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