The toughest Budget in 20 years was announced by Minister for Finance Brian Lenihan in the Dail (Parliament) on Tuesday, reflecting the severity of the economic problems now facing Ireland.
Due mainly to the property slump, tax revenues in Ireland now fall far short of what is needed to pay for state services.
The resulting deficit had reached crisis point, prompting the government to bring the Budget forward to October from December.
The main focus of the Budget was aimed at lowering the deficit by sharply reducing spending and raising taxes.
Among the headline measures announced were:
- A 1 percent levy on all incomes up to €100,100 and rising to 2 percent for those who earn above €100,100. This "temporary levy" is on top of the existing income tax that people pay.
- A 10 percent pay cut for all government ministers and all top senior civil servants. This is aimed at getting the tens of thousands of state workers to be moderate in seeking any more pay increases.
- The reduction of state agencies by 41. This is aimed at abolishing many of the state organizations that were set up in recent years.
- Taxes on cigarettes, wine, gas and running a car are all going up.
- Retention tax on investments rises by 3 percent to 23 percent.
- The standard sales tax is going up to 21.5 percent.
- The free medical cards giving free medical care to the over-70s are being abolished.
- There will be reductions in child benefit payments and childcare supplements.
These and many other changes in almost every area of government taxation and spending will have a cumulative effect on most family units in Ireland, with the middle class bearing most of the burden.
"We realize the solidarity it demands of all taxpayers," Lenihan told the Dail. "But there is too much at stake: we all have too much to lose by not taking action now.
"This levy will allow all income earners to contribute in a proportionate manner to the restoration of order and stability to the public finances."
Almost no area where people felt they were avoiding tax has been left untouched. For example, there is a €200 levy on employer-provided parking spaces in urban centers.
Lenihan said he expected the economy to shrink by 1.5 percent next year, as measured by GNP, and he predicted that unemployment would rise to 7.3 percent in 2009 but that inflation would slow to 2.5 percent as the economy slows down even further.
Even with all these higher taxes and cutbacks in spending, Lenihan said that there would be a Budget deficit of 6.5 percent of GDP next year, well above the EU limit of 3 percent. He said this was the best that could be achieved in this Budget, but that it was his intention to get it down closer to the EU limit over the next few years.
In framing this week's Budget, Lenihan faced the most difficult financial situation that Ireland has seen since the '80s.
State spending had soared over the boom years, but a lot of this was paid for by taxes coming from the property sector. With the collapse of the housing market here over the past year, that tax stream dried up and a huge and unsustainable deficit in the government budget opened up.
This week's early Budget was designed to meet that challenge.
The budget crisis in Ireland was made even more difficult by the global credit crunch, which has put more pressure on the government finances at the worst possible time here.
There was some criticism from the opposition parties that this Budget had not been courageous enough to tackle the soaring level of state spending, especially on the high numbers of state workers. Instead of doing this, the government was spreading a heavy tax burden across the economy, across all families and businesses, the opposition said.
The Fine Gael finance spokesperson Richard Bruton said that instead of helping the situation the tax increases announced in the budget would crucify people on modest incomes.
But the sheer number of small changes announced by Lenihan blunted the opposition criticism. It also led to a muted response initially from the public, who were confused by the detail and had been expecting even more bad news from the signals given in advance by government ministers.
Among the other changes announced in the Budget aimed at raising an extra €2 billion in taxes in 2009 was one which will impact on travelers. From March 30 next year will be a €10 tax on air travel from Ireland which will apply to all Irish airports, with a lower rate of €2 on shorter air journeys.
One noticeable item to escape the higher tax net was beer, reflecting the continuing poor sales in Irish pubs.