Irish bail-out: Ireland unveils a 'roadmap to the stone age'

• PM Brian Cowen's face says it all on a grim day for Ireland Picture: PA

Taoiseach Brian Cowen revealed a series of austerity measures to try to save his country from bankruptcy as the European Union (EU) and International Monetary Fund (IMF) handed it an €85 billion (72bn) bail-out package to stabilise the economy.

The UK is understood to be giving about 13bn in loans to Ireland, including 6bn as part of the EU/ IMF package, but the British government has refused to force the former Celtic Tiger to increase its corporation tax of 12.5 per cent.

Irish ministers had made it clear that keeping the corporation tax rate low to try to stimulate the economy was its red line.

Instead in a four-year plan, it intends to hike VAT by two per cent to 24 per cent, cut welfare by 2.5bn, reduce the public sector pay bill by 1.2bn and slash the minimum wage by one euro to €7.65.

Water bills in the country are set to rise with compulsory metering being introduced and carbon tax charges will double to €30 a tonne. There will also be increases in student fees.

Overall the €6bn of cuts announced yesterday bring the total austerity measures over the last 12 months to €21bn.

The budget is set to be debated on 7 December but indications are that it will be passed with opposition parties abstaining to allow the bail-out to go ahead and save the country from collapse.

However, Mr Cowen's position is still in doubt and he has been forced by the Greens, his junior partners in government, to accept a January election as the price of getting the budget through. Yesterday Mr Cowen described the budget as an "overdraft" when he was addressing members of the Dail.

"It's to bring certainty for our people," he said. "It's to ensure that they have hope for the future. To let them know that while we have a challenging time ahead, we can and will pull through, as we have in the past."

Mr Cowen said: "It's a time for us to pull together as a people. It's a time to confront these challenges . . . in a united way."

The plan was unveiled in Government Buildings, central Dublin, by the Taoiseach, finance minister Brian Lenihan and John Gormley, leader of the junior coalition partners the Greens and environment minister.

Mr Gormley said his party focused on education and environmental measures, such as water rates, renewable energy and broadband.

"We are proud that education spending will be increased over the coming period," he said. "This is vital to protect the needs of a rising generation.

"Increased spending on education is, above all, central to the efforts to rebuild national prosperity."

Trade unionist Jack O'Connor of Siptu later said: "It has all the hallmarks of a roadmap to the stone age."

The Irish government said the tax base had been eroded to unsustainable levels during the Celtic Tiger with the burden falling on a smaller number of people. It now aims to put income tax levels back to 2006 levels.

The state, along with most European countries, has been battling to encourage young workers to save for their future and as a result built up €2.5bn of pension tax relief.

The system, which at present strongly benefits middle-income earners on about €45,000 a year will be overhauled and slashed in half raising €700m.

Income tax relief on pension contributions will be reduced from 41 per cent to 34 per cent in 2012, to 27 per cent in 2013 and 20 per cent in 2014.

The government estimates workers on those wages paying into a pension could see their pay hit by 2.5 per cent.

The plan noted that officials were concerned about putting people off saving for their futures and that the move may reduce private pensions.

But it added: "However, the government is committed to raising €700m from this sector over the period of the plan and is willing to engage with the industry to examine alternatives to deliver this outcome."

The Irish government also said the reforms on relief would be monitored to ensure no abusive tax sheltering.

EU Commissioner for Economic and Monetary Affairs Olli Rehn hailed the four-year plan as a "sound basis" for negotiations on the final details of an international bail-out to bolster Dublin's recovery efforts.

"I welcome the continued commitment of the Irish authorities to reducing the deficit to below 3 per cent by 2014. The four-year fiscal plan is an important contribution to the stabilisation of Irish public finances." said Mr Rehn in a statement in Brussels.

He went on: "The plan strikes a good balance of durable expenditure and revenue measures, with due regard to protecting the least well off.

"A 2011 budget involving a consolidation effort of €6bn would be appropriate, as it would strike a balance between allowing the nascent recovery to strengthen and addressing budgetary challenges in a timely fashion."

He said the structural reform commitments in the plan were also welcome: "These policies encourage exports and a recovery of domestic demand.

"Implementation of the reforms will thus contribute to the authorities' ambitious fiscal adjustment strategy and a return to fiscal sustainability."