Irish hike tax and cut spending

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The Irish Finance Minister Brian Lenihan unveiled hefty hikes in income tax and spending cuts Tuesday in an emergency budget designed to restore international confidence in the shaky finances of debt-struck Ireland.

Lenihan told the Irish parliament that the government's painstakingly negotiated plan would trim €3.25 billion ($4.65 billion) this year from Ireland's ballooning deficit — the worst in the 16-nation euro zone — and a further €2.7 billion in 2010.

The finance chief said most of the deficit narrowing this year would come from higher taxes on incomes, rather than cuts in spending, which would accelerate in 2010. He warned that Ireland appeared on course to see its economy shrink by 8 percent this year, "the sharpest fall on record."

Ireland collected €47.8 billion in taxes in 2007 and €41 billion in 2008, but is projected to collect just €34 billion this year — reflecting a taxation system too dependent on disappearing revenues from property sales and capital gains transactions.

Incomes, by contrast, have been taxed at low rates versus European norms. But Lenihan said immediate flat-rate levies would be imposed on incomes, with the rate of deductions increasing progressively on higher salaries. He said someone making €50,000 would pay 4 percent more annually in income tax, while someone on €300,000 would pay 9 percent more.

"Those who have most must give most," he said.

He said Ireland would incorporate those levies into higher income tax rates at the start of 2010, but could not formally do it now — in the middle of a tax year — because this would sow confusion and chaos in people's 2009 income tax preparations and payments.

Analysts warned that the government needed to deliver more spending cuts to reassure investors in debt-hit Ireland, which is violating the terms of its euro membership and has seen its credit ratings weaken.

The government had initially hoped to cut nearer to €4.5 billion from this year's deficit but found it politically impossible to achieve during 10 Cabinet meetings in recent weeks.