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P 101637Z DEC 09
FM AMEMBASSY DUBLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 0365
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBL/AMCONSUL BELFAST 1130

C O N F I D E N T I A L SECTION 01 OF 02 DUBLIN 000538 
 
SIPDIS 
 
TREASURY FOR VIMAL ATUKORALA 
 
E.O. 12958: DECL: 12/10/2019 
TAGS: ECON PREL PGOV EFIN EI
SUBJECT: IRELAND: PREDICTABLE BUDGET/UNPREDICTABLE FINANCE 
MINISTER COMMENTS 
 
DUBLIN 00000538  001.2 OF 002 
 
 
Classified By: DCM Robert J. Faucher.  Reasons 1.4(b/d). 
 
¶1. (C) Summary: On December 9, the Irish government delivered 
its 2010 budget.  Looking to save at least four billion Euro 
(USD 6 billion), the government had signaled for months that 
public sector pay and social welfare would make up a large 
chunk of the spending cuts and there were no great surprises. 
 The 2010 budget is widely perceived as the most draconian in 
decades.  It calls for USD 86.9 billion in spending and 
anticipates USD 54 billion in revenues, leaving a deficit of 
USD 32.9 billion.  The only notable tax change was the 
expected imposition of a carbon tax.  Finance Minister Brian 
Lenihan said that the economy has, "turned a corner," and 
that, "(this budget)is going to be the last of the very 
difficult budgets."  The opposition attacked both Lenihan's 
comments and the government's social welfare cuts.  Most 
commentators we have spoken to or who have commented publicly 
expect even more difficult budgets over the next several 
years.  Lenihan's remarks will make next year's budget even 
more difficult to sell to the voter.  End Summary. 
 
Spending Cuts Predominate 
------------------------- 
 
¶2. (SBU)  The Irish government "softened up" (as one of our 
contacts put it) the Irish public for the harsh budget by 
commissioning two independent bodies to recommend spending 
cuts and tax increases.  The recommendations have been 
debated for months now so the announced spending cuts were no 
surprise.  The key cuts amounted to around USD 6 billion (a 
little over two percent of GDP) and included reductions in 
public sector pay (USD 1.5 billion) and social welfare 
payments (USD 1.1 billion), with the remainder coming from 
capital spending cuts and other line-item current spending 
cuts.  Public sector employees will face paycuts of five to 
15 percent. 
 
¶3. (C) As called for by private economists and the business 
community, the Irish government included very few tax 
increases.  Rossa White, chief economist at Davy's 
Stockbrokers, told Econoff that the net tax increases totaled 
an almost negligible USD 25 million.  The main tax change was 
the introduction of a carbon tax of USD 22.50/ton which will 
increase gasoline and heating fuel prices mainly.  In an 
effort to revive the economy, the government is focusing on 
competitiveness -- both a reduction in the general price 
level and retaining and attracting globally mobile foreign 
direct investment.  Raising marginal income tax rates or the 
now sacrosanct 12.5 percent corporate tax rate would have run 
counter to this push. 
 
Minister Lenihan Creates a Target... 
------------------------------------ 
 
¶4. (C) In the past two days Finance Minister Lenihan has said 
that the economy has, "turned a corner," and that, "(this 
budget)is going to be the last of the very difficult 
budgets."  Local economist Constantin Gurdgiev (and others we 
spoke to) told Econoff that both of these statements fly in 
the face of reality.  By his calculations, the government 
will have to "find" at least an additional USD 21 billion 
over the next three budgets to come under the EU limit of a 
three percent of GDP deficit.  He estimated that the 
structural deficit (that part of the deficit that will not 
disappear with an improved economy) is between five and eight 
percent of GDP.  In a lunch last week with the Ambassador, 
Jim Power, chief economist at Friends First, said that he 
does not expect economic growth to return until at the 
earliest 2011.  In a conversation with Econoff, Power echoed 
a point Gurdgiev made that the government's trend growth 
projection of 3.75 percent over the next several years is 
"wildly optimistic."  If growth does not reach these levels, 
the government will have to cut more. 
 
... and the Opposition Takes Aim 
-------------------------------- 
 
¶5. (SBU) Having gained some, but not enough, political 
advantage over the last several months from haranguing the 
government on the economy and impending budget, the 
opposition's reaction to the budget announcement focused on 
Lenihan's comments about this being the "last" difficult 
budget.  According to press reports, Fine Gael finance 
spokesman Richard Bruton dismissed the idea that the worst 
was over and pointed out that an office cleaner in the 
Finance Department would take a larger proportionate pay cut 
than Lenihan.  Labour Party leader Eamon Gilmore described 
the announcement as, "a scam designed to mislead the public." 
 Even Green Party leader John Gormley, whose party is a 
 
DUBLIN 00000538  002.2 OF 002 
 
 
junior partner in the government, could only offer tepid 
support saying, "given the difficult choices we had to make, 
I believe it is, in the main, a fair budget." 
 
¶6. (C) On December 10, PolOff spoke with Mark Garrett, Chief 
of Staff for the Labour Party who noted that "there is a 
disconnect between the media and the public.  The media has 
taken a "pain is necessary" stance, but the public is 
disenfranchised.  Ireland isn't France and there won't be 
rioting in the streets, but there is a strong likelihood that 
this will manifest itself in the political arena."  Econoff 
spoke with Andrew McDowell, Director of Research for Fine 
Gael, who said that "there were no great, visionary ideas, 
despite what was signaled in the McCarthy report.  Not one 
state agency was abolished."  He added that the budget did 
not set out a, "new plan for the economy or public sector 
reform." 
 
Unions Threaten Action 
---------------------- 
 
¶7. (C) The unions are less than pleased with the budget and 
are calling for strikes in response.  Peter McLoone, head of 
the largest public sector union, Impact, warned the 
government that his 350,000 members would now prepare for 
industrial action.  McLoone said that the government's 
intention to cut the link between public sector pay and 
pensions meant that the government had decided to "walk away" 
from the social partnership arrangement.  (Note: the social 
partnership is the process of negotiation between employers, 
unions, and the government on employment-related issues.  The 
process contributed to the revival of the Irish economy but 
many now question its relevancy.  End Note.)  Garrett 
suggested that the reaction would be much less severe.  He 
noted that there is unlikely to be an additional walkout as 
the public sector is smarting from the salary reduction and 
most aren't eager to lose additional days of pay.  Garrett 
added that union members will likely react by not cooperating 
with proposed reforms and creating other difficulties at the 
local level. 
 
Comment 
------- 
 
¶8. (C) There was never really any mystery about what would be 
in the budget.  The governmentdid a good job of signaling 
its intentions early on and allowing the public to come to 
grips with the reality over time.  What is a mystery is why 
Lenihan would issue the statements on a rebound in the 
economy and the end of the tough budgets.  It is hard to find 
someone who agrees with him and it is likely that next year's 
budget will be even more difficult.  Whether it was bad 
speechwriting, a slip-up, an attempt to kick-the-can down the 
road, or something else, the opposition will surely reference 
these comments next year in the lead up to Budget 2011.  That 
said, we expect the budget announcement to have little 
political impact on the government coalition and we do not 
expect the unions will force a walk-back on public sector pay 
cuts.  The government has no other "less bad" option. 
ROONEY