Published Wednesday, December 9, 2009, 9:56 AM

The axe is about to fall. On Wednesday of this week the Irish Minister for Finance Brian Lenihan will present his Budget for 2010 to the Dail (Parliament), and it is going to be the toughest since the foundation of the state.

A huge lump has to be cut out of state spending in Ireland to stop the country going bankrupt. And that means cutting back sharply in ways that are going to severely hit the living standard of every person in the country.

It's going to be a Scrooge-style Christmas here. Instead of Ho! Ho! Ho! we're just going to have Ho! Ho!, or if he really swings that axe, maybe just a single Ho!

It's worth reminding ourselves how deep the hole we are in actually is, and why such drastic cutbacks are necessary.

This year total government spending in Ireland will be at least 54 ($79.4 billion and total tax revenue will be around 32 ($47) billion, leaving us a massive deficit of22 ($32) billion. That means that we are now borrowing between one third and one half of everything the state spends.

You don't have to be an economist to see that borrowing that high cannot go on without the country going bust within a few years.

So what's gone wrong? We've gone from boom to bust in just two years, thanks to the global financial crisis and the collapse of the Irish property bubble which caused Irish tax revenues to plummet.

Our problem is that during the boom years state spending here soared as tax revenue rolled in. Now that it's gone into reverse we have to cut back, and that is extremely difficult.

We would already have gone bust except that we are part of the European Union. The European Central Bank has rescued us, giving us the money to prop up the Irish banks and to pay for much of the day to day spending of the state.

But to get this money we had to agree with the EU that we would sort out our financial mess over the next four years. We need to get our deficit down to around 10 ($15) billion in that time, which would be an acceptable level in the medium term.

And that means severe cutbacks in each of the next four years, starting with an agreed 4 ($5.9) billion reduction in the budget deficit next year.

There is general acceptance that there is limited scope for further tax increases, so cutting state spending is the only way we can go. The EU knows that. The government knows that. And everyone here knows that.

So where is the money to come from? State spending in Ireland divides into three roughly equal parts -- one third on welfare, one third on state pay and one third on everything else.

In fact this year, thanks to soaring unemployment, it was 38% on welfare, 34% on state pay and pensions and 28% on everything else.

That means it is impossible to cut state spending significantly without taking chunks out of welfare payments and state pay.

Up to now, those two areas have been the sacred cows that could not be touched. But given the crisis we are now in, that has to change.

From the hints given by the government in the past week, about a billion will be cut from welfare in the budget. Another 1.3 ($2) billion will be cut from the state pay bill.

A new carbon tax (on petroleum products and fossil fuels) will bring in about half a billion. And more cuts in other areas of spending will then produce the required 4 ($5.9) billion reduction in the deficit next year.

It's easy to say it quickly like that. But it's going to be very painful. And the unions representing the state workers have been fighting it every inch of the way.

Last week there were intense negotiations between the unions and the government to try to avoid pay cuts. The unions came up with a compromise under which all state workers would take 12 days unpaid leave in the coming year, which would reduce the state pay bill.

But this idea led to public uproar. Hospitals can barely cope at the moment, so how could staff take an extra 12 days holiday?

We already have the shortest school year in Europe. Crime is as bad as ever. So how could teachers and the police take even more time off?

The unions were also promising a complete transformation of state services, giving better services for less money. But they have been promising that for years in the various national pay deals which gave them big pay increases, and they have never delivered.

The real reason they came up with this mad idea was because taking 12 days unpaid leave would leave their state guaranteed pensions untouched. At a time when so many people in the private sector have lost their jobs and when private pensions have collapsed, that was infuriating. Eventually, after a deafening public outcry about the deal being cooked up, the government said no.

So the budget will contain pay cuts of 1.3 ($1.9) billion for state workers, which will equate to around 6%. That comes on top of the 7% pension levy that has already been imposed on them.

Already the police, the teachers and the nurses are threatening to strike if the pay cuts go ahead. But the die is cast and there is little public sympathy for them.

They have guaranteed jobs with high pay and pensions. Many state workers get index linked, guaranteed pensions of 60% of their final salary, something that private sector workers, who can lose their jobs at any time, can only dream about.

As far as welfare payments are concerned, the government is arguing that the cost of living has fallen sharply this year so welfare can be cut by up to 4% without causing hardship. Even so, cutting welfare is going to be hugely controversial.

If you are reading this in America on Wednesday afternoon or Thursday morning the budget will already be out in Ireland, and you can log on to and get the gory details in full.

Since budgets are always secret and this column is being written in advance, I can't say exactly what's going to be in it. But we have a pretty good idea because the government has been preparing people for the shock by giving us clear indications of what is coming.

We have been told, for example, that Taoiseach (Prime Minister) Brian Cowen's salary is likely to be cut by 60,000 ($88,000), or 20%, to 228,466 ($336,379). That tells us two things.

First of all, it confirms that the pay of all state workers is going to be cut and the taoiseach wants to lead by example. And secondly, it shows just how far salaries here have got out of line.

Even after the cut, Cowen will still earn more than the British Prime Minister Gordon Brown, despite the fact that Britain is a global player and the British population is 10 times bigger than ours.

Another example is school teachers in Ireland, who on average earn up to 30% more than in Britain.

Not all state workers here are so much out of line with European norms, but it is clear that the cost of state pay in Ireland is too high and must come down.

The adjustment is happening already in the private sector, where so many companies have gone bust because the cost of doing business in Ireland has gone so high. We have to restore our competitiveness, and lowering pay rates across the economy is part of that.

The workers in the state sector can resist and threaten strikes. But they are battling against the inevitable because we have to cut back on state spending or else we go under and then we'll be at the mercy of the IMF.

And those guys have never even heard of Santa Claus.

Ho ho ho indeed.