Defeated Irish meet savage cuts with grim acceptance

Ireland has moved steadily through the five stages of grief since the collapse of its "tiger" economy last year.

Denial and anger marked the early months, but last week it reached the final stage - acceptance - when Brian Lenihan, the Minister for Finance, introduced a Budget so harsh that it was described as "masochistic" by the Financial Times.

Lenihan had no choice but savagery. The scale of Ireland's collapse from boom to bust has been breathtaking. In less than two years, its once vibrant economy has crumpled into a deep recession that has doubled unemployment, destroyed businesses and savaged the Government's finances.

The construction sector, which had swollen to a fifth of the total economy on the back of cheap credit, has collapsed and Ireland's banks survive on taxpayer handouts and state guarantees.

Plunging tax revenues have forced the Irish Government to borrow almost €500 million ($1000 million) a week to pay its bills. Doubts about its willingness to face reality have seen Ireland competing with Greece as the highest-priced and riskiest borrower in the eurozone. Ireland, after a 15-year boom, was going broke.

Because Ireland is a member of the euro, Lenihan cannot devalue. The only way to reduce costs and regain the competitiveness is to embark on a painful "internal devaluation": cutting wages and prices throughout the economy.

Crucially, too, Ireland's coalition Government of Fianna Fail and the Green Party is in mid-term and so deeply unpopular with voters that it can scarcely fall any lower. Its only hope of redemption lies in toughness, and it has nothing to lose.

So Lenihan wielded the axe for the second time this year, cutting social welfare by 4 per cent, public sector pay by up to 15 per cent, child benefit by 10 per cent, capital spending and the health budget.

The cuts, when added to his emergency Budget last April, which raised taxes and also cut public sector pay, will stabilise Ireland's finances.

Next year's borrowing should not be any higher than this year's and could start to fall, while tax revenues may start to recover if the benefits of an international recovery help refloat the economy. That, at least, is what Lenihan hopes. He says the worst is over, that next year's Budget will not be as savage and that Ireland is on the road to rehabilitation.

His reward was a slight improvement in the price of Irish debt, as Ireland put distance between itself and the Greeks - a vital distinction for a country that must borrow to stay afloat.

While the international markets approved, the reaction at home was less certain. Months of pre-Budget conditioning had numbed the public to the pain and created a broad political consensus that cuts in spending were inevitable and essential. But for the trade unions Lenihan's Budget represented defeat.

They had come agonisingly close to brokering a deal with the Government the previous week that would have substituted unpaid leave for pay cuts in the public sector, a scheme that would have placated their members.

For a moment, the Government blinked, signalling that it would consider the deal, but Lenihan and his officials insisted that there could be no fudge: the savings had to be permanent and transparent.

The unions were as shocked as they were infuriated: the Government's refusal to do a deal marked an end to 20 years of "social partnership" - an arrangement that grew, in time, to embrace social policy and which gave the unions unparalleled access to government decision-making. Now they are threatening sustained industrial action to reverse the pay cuts and the Garda Siochana, the Republic's police force, is balloting on strike action even though a strike would be illegal.

The next three months will be pivotal. The unions, which draw most of their strength from the public sector, cannot be certain that their members will back lengthy strikes and know that they will struggle to secure public support. Although public sector workers have endured two substantial pay cuts this year - up to 7.5 per cent in April, and up to 15 per cent last week - they still have secure jobs and pensions: valuable commodities in a country with almost half a million people unemployed.

Lenihan and Brian Cowen, the Taoiseach, say they have no choice but to make deep and permanent cuts in government spending and want to find further savings in the public sector next year. Although Lenihan hopes for the best, Ireland's prospects of swift recovery are precarious. Apart from the threat posed by the trade unions, the banks still teeter on the brink of insolvency as the full cost of the property bubble has yet to emerge.

Bank analysts fear that a second wave of losses could come from residential mortgages, with tens of thousands of homeowners saddled with negative equity.

Last week's savagery, and its calm acceptance by so many, has bought Ireland some breathing space. If acceptance does not revert to denial and anger Ireland has a chance of making the further changes that will be essential to bring about a full repair. But if the unions succeed in frustrating the cuts by destroying the Government, the International Monetary Fund will be forced to pick up Lenihan's axe, and it will wield it with even more violence.

SWINGING THE AXE

* Problem: 7.5pc shrinkage of economy.
* Target: €4 billion savings.
* Cuts:4pc social welfare, 5pc- 15pc public sector pay, 10pc child benefit.

- OBSERVER