Ireland's Rescue Package.

On November 22nd the Republic of Ireland formally applied to the International Monetary Fund (IMF) for an economic bailout to be supported by the European Union (EU). Much like when you apply for a bank loan Ireland have submitted all the paperwork and is just waiting for the IMF to agree the terms and conditions of the loan. This means that no official announcement has been made and no firm details have been released.

However from the rumours that have been circulating it is believed that the IMF will make a low interest loan of between 75 and 90bn Euros with the best guess being E85bn. The vast majority of this money will be used to recapitalise Ireland's banks. This makes perfect sense because Ireland's recession has been a property driven recession. That means that during the boom years Irish banks made lots of loans to property developments that went bust. It is the high number of these bad loans that are undermining confidence in the Irish economy. Increasing the amount of capital held in reserves increases the amount of these bad loans that Irish banks can absorb without collapsing restoring confidence in the economy as a whole. The rest on the money will be used to help the Irish government meet it's day to day expenses. Without it the Irish government would be forced to raise this money from the international bond markets at a much higher cost if they can raise it at all.

In return the IMF has asked Ireland to make E20bn in savings but has given the Irish government great freedom to choose where exactly those savings come from. This means that Ireland gets to keep its low 12.5% corporate tax rate. However the Irish government have today (24/11) have released a 4 year recovery plan which shows it intends to reach that E20bn figure through E15bn of spending cuts and E5bn of tax increases. This recovery plan will form the basis for the government's next budget. The main proposed tax increases are;

• An increase in the rate of Value Added Tax (VAT) to 23% by 2014.
• Changes to the income tax system which I don't know enough about to comment on but are expected to raise E1.2bn.
  
• A new property tax of around E200 per year to be paid by people who own property.

The main spending cuts will be;

• 25,000 public sector jobs to be cut.
• Pay freezes for public sector workers.
• A 10% pay cut for new public sector employees.
• A new, less generous public sector pension scheme.

Although harsh, especially on top of existing austerity measures, these proposals seem to be quite fair and most importantly necessary. The only real area of concern I have is over rumoured proposals to change the unemployment benefit system so that payments are reduced and eventually stopped after someone has been out of work for six months. This is the American welfare model and highlights the problems with the IMF's often one size fits all approach to economic development. Although Ireland has high levels of unemployment this is mainly caused by an historic failure of the Irish economy to generate jobs rather then an overly generous welfare state. In the past this lack of employment has forced vast numbers of Irish men and women to migrate to other countries in order to find work. This is such a feature of the Irish economy that people often used to joke that Ireland's two main exports were guinness and people. So if unemployment payments are cut and the E1 cut to the minimum wage doesn't generate enough jobs Ireland faces a possible brain drain as large numbers of their talented people move to other EU countries to find work. This sort of migration will obviously also have a negative impact on those other countries own attempts to reduce their unemployment rates. So I hope that the IMF is prepared to have some flexibility on this proposal.

Unappealing as this all is it's important to remember that it wasn't the IMF that ruined the Irish economy. It was the Irish government that ruined the Irish economy. The fact that yesterday one of Ireland's major newspapers ran a front page featuring a picture of the Prime Minister alongside the headline "Go Now You Gobshite!" suggests that the Irish people have more then already worked that out for themselves. This has led to one of the parties in the governing coalition to threaten to bring down the government unless a General Election is called by February 2011. Sadly this actually creates more problems then it solves because if the Irish Parliament fails to pass the Prime Ministers rescue plan the IMF bailout disappears and Ireland's economic problems get much worse.

So I think that while the Ireland's politicians should rigorously question these economic proposals in order to get the most effective plan they should avoid party political grandstanding and unite to pass Ireland's budget because it would make a fitting epitaph to Brian Cowen's political career.