Welfare, pensions, salaries slashed if we quit bailout
Stark options outlined after row over deal
Published 09/05/2011 | 05:00
PENSIONS, child benefit and the wages of 300,000 public sector workers would be slashed by 33pc if we abandoned the EU-IMF bailout deal, the Government warned last night.
The Department of Finance issued the stark forecast in response to a prediction by leading economist Morgan Kelly that we face bankruptcy unless we pull out of the deal.
The Government insisted it would continue with the bailout plan and hopes to negotiate a 1pc cut in the interest rate next week, as it seeks better terms to match those of Portugal and Greece.
Finance officials graphically outlined the consequences of walking away from the EU and IMF.
If we reneged on the deal, the Government would have to immediately slash €18bn off public spending to be able to fund itself because it would no longer have financial support from the EU/IMF.
This would, for example, knock the jobseekers' allowance from €188 to €126 a week, child benefit from €140 to €94 and the old-age pension from €219 to €146.
And public sector workers earning €40,000 a year would face cuts of more than €13,000 in their annual salary.
Abandoning the bailout would also force the Government to get all its money from the international markets and it could face interest rates of more than 10pc -- around double what it gets with the bailout loans.
The department signalled drastic measures that would affect everyone in such a scenario.
Swingeing cuts in social welfare and public sector wages, or "sizeable tax increases" and "widespread reductions in public services" could plunge the country into deep recession for many years, it said.
Its warnings came at the end of a dramatic day when Central Bank Governor Patrick Honohan was compelled to defend his role in the run-up to the original bailout deal.
In a strongly worded rebuttal, Prof Honohan dismissed accusations that he had sided with the ECB during bailout negotiations.
"I was playing for Ireland," he said. "I was not involved in any of the discussions that the lenders would have had in their teams. I was never involved in the ECB side."
A fierce row raged across the political and economic stage all weekend after Prof Kelly outlined his radical proposals for abandoning the bailout.
The UCD economist, famed for predicting the massive Irish property crash, said that the Government should walk away from the banking debt, leaving it to the ECB. He said this would leave the country with a "survivable" €110bn debt.
The second phase would involve bringing the domestic budget into balance with immediate draconian cuts.
But to do this the Government would have to immediately slash €18bn off public spending to be able to fund itself without outside financial support.
Transport Minister Leo Varadkar was also quick to dismiss calls to pull out of the bailout deal.
"In my view, that's not a solution. If you do that, first of all you impose personal bankruptcy on a lot of people, horrendous social consequences on working people and people on social welfare," he said.
The Government is now hoping to secure a 1pc reduction in the 5.8pc interest rate on the bulk of the €67bn bailout deal, which comes from the EU.
That could shave €400m a year off Ireland's bailout loan repayments.
However, the Government is still committed to introducing €3.6bn of spending cuts and tax hikes in the forthcoming Budget.