Ireland’s Painful 2012 Budget: 23 % VAT, €3.5bn in Spending Cuts

December 7, 2011Marketsby EW News Desk Team

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Ireland’s finance minister Michael Noonan has unveiled the country’s 2012 austerity budget. In order to qualify for continuing IMF-EU loans, the painful budget saw taxes increase by a further 2 percent and included a deep spending cut.

The Irish government on Monday announced a total of €3.5 billion in budget savings. In his address to parliament, Minister for Public Expenditure and Reform Brendan Howlin said the budget was necessary to protect the “long-term and strategic interests of the state and its citizens.”

Related: U2 to invest in music study as Ireland cuts spending

No government, whatever its numbers, wants to be the bearer of bad news. But our options are extremely limited, Howlin told a packed audience yesterday.

“There is no hiding from the fact that, as a government, we must take very difficult decisions.”

As part of the austerity cuts, the highest expenditure departments, health, social protection and education, are expected to absorb the brunt of the cuts. The weekly social welfare payments, however, will be protected.

Accordingly, the public service pay bill will fall by €400m in 2012, with plans to limit recruitment and to reduce the size of the public service by a further 6,000. The health budget would shrink by €543m and €475m removed from social protection. In fact, 31 police stations will be shut throughout the country.

In line with the 2012 budget theme of taxing what people spend and consume, finance minister Noonan introduced a range of capital taxes and confirmed a 2 percent increase on VAT to 23 percent – noting that 20 out of the 27 EU countries had increased VAT in the last four years and further increases are being considered by the member states.

Related Information: Ireland VAT

The tax changes are expected to generate €1.6 billion to help drive down the country’s huge deficits. Income tax remains unchanged while the Republic’s low corporation tax stays at 12.5 percent.

The Irish press has been so far scathing in their criticism of the latest Budget. In an opinion-piece, the Irish Times referred to the Budget as “pain without economic vision,” pointing out that “there was much talk about the need for job creation but few specifics were provided on how this can be achieved.”

Related Statistics: Ireland Unemployment Rate, Total Government Net Debt, Ratio of Debt to GDP

The Irish Examiner too, was mocking in its analysis of the Budget, writing that “the Finance Minister took to his feet to deliver a well-crafted speech,” and “gave the appearance that he was giving more than he was taking away.”

Referring to the tax changes, the paper said: “Avoiding income tax means that many extra stealth charges will be hidden in the small print to raise €1.6bn in taxes.”

As Ireland negotiates its way out of a recession, the 2012 austerity budget is the country’s fourth consecutive austerity budget in four years.

Ireland was the first eurozone country to go into recession after its property bubble burst in 2008. Currently, Ireland is only part-way through an eight-year cycle of painful austerity plans as it attempts to reduce its debt in line with IMF-EU bailout regulations.

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