Deficit-hit Ireland slashes salaries, welfare pay

AP News
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Posted: Dec 09, 2009 1:10 PM

Ireland slashed pay for state workers, cut welfare benefits and imposed new environmental taxes on fuel Wednesday as it unveiled a record euro4 billion ($6 billion) in budget cuts to combat a runaway deficit.

Finance Minister Brian Lenihan said about 400,000 state workers _ a fifth of the country's work force _ would suffer pay cuts ranging from 5 percent to 15 percent and Prime Minister Brian Cowen will cut his salary a full 20 percent.

The plan _ Ireland's biggest budget cut in history _ aims to save more than euro1 billion ($1.47 billion) in salary cuts alone next year.

"By taking the difficult but necessary measures now, we will rebuild our nation's self-confidence here at home and our reputation abroad," Lenihan said.

Lenihan said the drastic measures were needed to put a dent in a deficit projected to top euro22 billion ($32 billion) this year, to restore Ireland's lost competitiveness as a base for foreign investment in the 16-nation euro currency zone and to stop a rise in unemployment that has reached 12.5 percent.

"Our prices are still among the highest in Europe. Over the last decade, wages have gone up 70 percent, well above the euro-area average. Put simply, we have priced ourselves out of the market," he told lawmakers. "We will not be able to stem the hemorrhage of jobs until our prices and the costs of doing business here move down in line with those of our main trading partners."

The finance chief also unveiled euro760 million ($1.1 billion) in annual cuts for Ireland's relatively generous welfare system, while the struggling health service also suffered a euro400 million ($588 million) cut in services.

He also unveiled a new regime of "carbon taxes" on various fuels to generate an additional euro500 million ($735 million) annually. The new taxes will immediately raise the price of all fossil fuels, including gasoline, diesel, coal and even Ireland's bog-cut turf bricks, a major source for generating electricity here.

"Changing behavior takes time, but a start has to be made," he said.

Lenihan sought to offer one boost to public morale by cutting taxes on beer, wine and liquor. Ireland has the highest rate of alcohol consumption among major European nations, and sales in pubs and liquor stores represent an exceptionally high percentage of its economic activity.

He warned pub owners to cut their prices on pints of stout and whiskey shots, or suffer the consequences of renewed higher taxes.

"I expect the drinks industry to play its part in making the cost of alcohol more competitive. If I find this reduction has not been passed on to the consumer, I will reverse today's reduction," he said.

Lenihan said he would restore Ireland's national sales tax to 21 percent, starting Jan. 1. Earlier this year he raised it to 21.5 percent, a move that spurred increased cross-border shopping in the cheaper British territory of Northern Ireland.

Labor unions representing civil servants and public workers, including nurses and police, warned they could strike in protest at the pay cuts and lost benefits. These cuts come on top of hikes in income tax imposed earlier this year that have left many struggling to pay their mortgages on devalued homes.

But economists and business leaders agreed the government had no choice but to slash spending immediately because of a deficit projected to grow to a staggering 13 percent of gross domestic product next year.

Ireland and Greece are the worst offenders in the euro zone, which requires members to keep deficit spending to 3 percent of GDP.

If Ireland fails to mount a credible counterattack to its deficit, it may be forced to pay higher interest rates on its debt obligations to foreign bondholders, making a bad situation even worse.

Reflecting foreign fears of potential Irish debt defaults, the interest rates on Irish bonds rose Wednesday to a six-month high versus the European benchmark rates on German debt.

Ireland enjoyed Europe's longest sustained growth from 1994 to 2007 amid unprecedented investment by foreign high-tech firms seeking a low-tax base in the European Union.

But Ireland's Celtic Tiger boom collapsed amid the global credit crisis, which exposed Ireland's reckless reliance on foreign lending and property speculation to fuel spending. International manufacturers based here increasingly are shifting production to Eastern Europe and Asia, citing Ireland's excessive labor and utilities costs.