Ireland's Minister for Finance, Michael Noonan, cuts GDP growth outlook.Cathal McNaughton/Reuters
Ireland cut its growth forecast for next year and fleshed out €1-billion worth of fresh tax measures on Tuesday under the shadow of a euro-zone debt crisis that threatens to derail its fragile recovery and force even more austerity on its recession-weary people.
Finance Minister Michael Noonan cut his outlook for gross domestic product growth to 1.3 per cent from 1.6 per cent, the second downgrade in a month, as the risk of a euro-zone recession hits the outlook for export growth and keeps the Irish consumer locked in a protracted downturn.
Mr. Noonan insisted the budget deficit target for this year is still on track but a worsening growth outlook could force him to push through even harsher austerity budgets in 2013 and beyond if Dublin is to meet its goals under an European Union-International Monetary Fund bailout.
"No matter what happens in the wider euro zone, Ireland needs to restore sustainability to its public finances," Mr. Noonan told a packed lower chamber.
"If the euro-zone crisis recedes, we are among the best placed to grow quickly, as evidenced by the EU Commission's growth forecasts. If the euro-zone crisis persists, it is equally important for the state to reduce our dependence on borrowing."
Standard & Poor's warned late Monday it could cut Ireland's credit rating as part of a mass euro-zone downgrade, leaving it one level shy of junk status, if Europe does not deal with its financial problems.
Until this week, S&P had been the most positive of the three main credit rating agencies on Ireland, rewarding its government with a stable outlook in August for its efforts in tackling the worst budget deficit in the industrialized world and a banking meltdown.
"If they didn't revise the growth forecast down, the whole framework would have lacked credibility. You would have to say that the risks to that forecast are on the downside in 2012," said Jim Power, chief economist at Friends First.
Mr. Noonan's tax plans, which come on the heels of €2.2-billion in spending cuts announced on Monday, were largely known after Reuters obtained details of the budget in documents given to German lawmakers last month.
The centrepiece of Mr. Noonan's tax plans are a two-percentage-point increase in the top rate of sales tax, which will raise €670-million as it is applied to around half of all goods and services. The new 23-per-cent rate is the highest in the euro zone, along with Greece, Portugal and Finland.
The remaining €330-million in tax revenues will be generated from indirect taxes including higher capital gains and capital acquisitions taxes and a new €100-a-year household charge, the sixth new tax introduced in the past three years.
In addition, some €600-million will be generated from tax measures carried over from last year.