PREVIEW-Irish budget on track, but aid deal under fire

* First of three tests for 2011 budget due on Tuesday

* Fine Gael seen unlikely to stand in way of passage

* Failure in vote would trigger election, stall EU/IMF funds

By Noah Barkin

DUBLIN, Dec 3 (BestGrowthStock) – The Irish government’s tough 2011
austerity budget is expected to pass a first test in parliament
next week, averting a snap election and assuring the country
wins quick access to EU/IMF rescue funds.

But some economists see the aid deal and the draconian cuts
it relies on as unsustainable and say a new government could
look to make changes as early as next year, possibly forcing
senior bondholders in Irish banks to take some losses.

Prime Minister Brian Cowen, whose popularity has plunged
into the single digits, has a razor-thin majority in parliament
that depends on two independent lawmakers who have not yet
stated how they plan to vote. [ID:nLDE6B207H]

If those two withhold their support, however, the main
opposition party Fine Gael is expected to abstain on Tuesday
when the first of three votes on the budget is held, keeping it
on track for passage. [ID:nLDE6B10J0]

Fine Gael has sharply criticised the government’s 85 billion
euro ($112.1 billion) aid deal this week with the European Union
and International Monetary Fund.

But it is not in its interests to see the budget fail as
that could expose the party to accusations of deepening the
crisis, caused by the massive cost to the state of shoring up
banks that lent recklessly during a property boom. This year’s
budget deficit is set to exceed 30 percent of GDP. [ID:nWLA9883]

“I think it’s very unlikely that it won’t pass, despite some
of the strong rhetoric we’ve seen lately,” said John McHale, an
economics professor at the National University of Ireland in
Galway. “Everything would be on hold if it failed. A lot of
damage would be done to the credibility of the state.”

The main details of the budget are already known. It
foresees a whopping 6 billion euros in savings next year,
including roughly 4 billion euros in spending cuts and tax
adjustments designed to boost revenues by some 2 billion euros.

Roughly half of the additional tax income will be generated
by lowering income tax bands and tweaking tax credits, allowing
the government to target the 45 percent of Irish adults, on
lower incomes, who did not previously pay income tax.

The parliamentary vote on Tuesday will be focused on VAT and
excise tax changes, with a separate vote on social welfare
measures due later in the month and a third on general finance
steps in the first quarter of 2011. Cowen has committed to
calling an election once the final hurdle is out of the way.

“POLITICALLY UNSUSTAINABLE”
Thomas Conefrey, a researcher at the Economic and Social
Research Institute (ESRI) in Dublin, said he expected the 2011
measures and additional savings laid out in the government’s
four-year, 15 billion euro austerity plan to subtract a full
percentage point from annual growth in the coming years.

That could make it difficult for the government to achieve
its target for gross domestic product (GDP) growth of 1.75
percent next year. The EU/IMF agreement foresees a more modest
expansion of 0.9 percent.

A Reuters poll on Friday showed economists expect growth of
1.6 percent next year. But that depends on robust exports, which
could disappoint if the economies of Ireland’s biggest trading
partners, Britain and the United States, falter.

Opposition parties and economists have stepped up criticism
of the Irish government’s deal with the EU/IMF in recent days,
particularly the EU’s decision to spare senior bond holders in
Ireland’s crippled banks from shouldering some of the costs.

Instead, Irish taxpayers will take all the pain in a deal
economic historian Barry Eichengreen has called a “disaster” and
likened to the punitive Versailles Treaty imposed on Germany
after World War One.

He predicted in an article this week that a new Irish
government would be compelled to reject the deal negotiated by
its predecessor, calling it “politically unsustainable.”

Fine Gael and Labour Party leaders also signalled on Friday
that they could seek changes to the deal if they take power, as
expected, next year. [ID:nWLA9890]

“A populist backlash is inevitable,” Eichengreen, a
professor at the University of California at Berkeley said. “As
it is, the program will have to be revisited, perhaps as soon as
next year. Investors know this, which is why Irish (bond)
spreads have barely budged.”

(Editing by Mark Trevelyan)

PREVIEW-Irish budget on track, but aid deal under fire