Ireland's government said Tuesday it must slash euro15 billion ($20.8 billion) from its annual deficits in a four-year plan designed to bring Europe's most runaway budget back within EU limits.
Finance Minister Brian Lenihan announced the unprecedented measure after two days of Cabinet meetings focused on controlling a deficit set this year to reach 32 percent of GDP, a modern European record, because of exceptional costs from bank bailouts. He warned that the heaviest spending cuts and tax rises would come in the 2011 budget.
Lenihan said the government had weighed the views of economic experts worldwide when deciding that the gap between tax collections and spending would have to be narrowed by euro15 billion _ nearly a third of current government expenditure _ by 2014.
The government last year had estimated that the correction would require half that figure. But Lehinan, said Ireland must cut twice as much because its economy _ two years into a recession that has tripled unemployment and ravaged a tax base dependent on property sales _ is now forecast to grow more weakly. The new plan presumes average annual growth through 2014 of approximately 2.75 percent, driven by the 1,000 export-focused multinationals based in Ireland.
The finance chief conceded that such heavy cuts would make the job of reviving Ireland's shellshocked domestic economy even tougher. But he said the nation had no choice, because it must lower the punitive interest rates on financing Ireland's long-term national debts.
Rates on Irish bonds that finance the debt remain 4 percentage points above their German counterparts, reflecting investors' worries that Ireland could go the way of Greece and require a foreign bailout. Ireland insists it's in no danger of that, citing secure borrowings through mid-2011 and strong reserves.
Lenihan said the euro15 billion shift would allow Ireland's deficit to be reduced to 3 percent of GDP _ the European Union requirement for euro-zone members _ in 2014.
Irish business leaders said such budget-slashing was stunning but necessary. They argued for a minimum of tax increases.
"It is essential that we don't stunt our fledgling economic recovery by overtaxing the country," said Fergal O'Brien, chief economist at the Irish Business and Employers Confederation, which represents more than 7,000 businesses.
"The Irish economy remains in the international spotlight and it is vital that we take the steps necessary to restore confidence. We must demonstrate our ability to solve our own problems and unfortunately this means tough decisions," O'Brien said.
The EU commissioner for economic affairs, Olli Rehn, met Lenihan in Brussels on Monday and is expected to travel to Ireland next week with senior aides to assess Ireland's latest deficit-fighting plans.
The EU Commission must sanction any Irish deficit plans, having already permitted Dublin to postpone its effort to return to 3 percent deficit spending from 2013 to 2014. Virtually all the 16 euro-zone members are currently exceeding the 3 percent rule.
Most of Ireland's 2010 deficit reflects exceptional spending to prop up five Irish banks that bet excessively on a boom-to-bust property market. Ireland had argued that such spending should be treated as long-term investments and not count against the deficit, but EU chiefs rejected that accounting maneuver. Even excluding the bailout costs, Ireland's deficit this year will exceed 14 percent, three points worse than Greece.
Analysts said Lenihan might have to unveil euro5 billion in cuts and tax hikes in the 2011 budget, far more than in the country's three previous emergency budgets. Lenihan said he would provide a specific 2011 figure when the government publishes details of its four-year plan in mid-November.