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Irish corporate tax in focus as bailout deal nears

French President Nicolas Sarkozy said on Saturday he expected Ireland to raise its corporate tax rate but added that an increase would not be a condition for any bailout.

business Updated: Nov 21, 2010 02:20 IST

French President Nicolas Sarkozy said on Saturday he expected Ireland to raise its corporate tax rate but added that an increase would not be a condition for any bailout.

International Monetary Fund and European Commission officials are in Dublin to discuss financial aid to help Ireland cope with its struggling banks, whose huge liabilities have sent Irish borrowing costs soaring.

The main concern for EU policymakers is that Ireland's problems will spread to other euro zone members with large budget deficits such as Spain and Portugal, threatening a systemic crisis.

Euro zone states want Ireland to raise its 12.5% corporate tax rate as part of any deal but Dublin argues the low rate is crucial to attracting foreign investment.

Sarkozy, speaking at a news conference in Lisbon on the sidelines of a NATO summit, said he expected Ireland to raise its corporate tax rate.

"It's obvious that when confronted with a situation like this there are two levers to use: spending and revenues," he said.

"I cannot imagine that our Irish friends, in full sovereignty, (would not use) this because they have a greater margin for manoeuvre than others, their taxes being lower than others".

"In the conditions for activating the (bailout) mechanism, there are no fiscal demands," he added.

The Irish Times newspaper reported that Ireland's four-year plan to reduce its deficit would be published on Tuesday, before any international financial aid package was ready.

Last month, Ireland doubled to 15 billion euros ($21 billion) the sum it calculated was needed to bring its deficit under control by 2014.

Finance Minister Brian Lenihan said this was designed to ensure Ireland would not need a bailout but it failed to calm jittery markets.

Ireland's central bank chief acknowledged this week the country needed a loan running into tens of billions of euros to shore up a banking sector that has grown dependent on ECB funds and seen an exodus of deposits over the past six months.

Cabinet to meet
The Irish Times said the government -- deeply unpopular and hanging on to a tiny parliamentary majority -- had pushed forward the publication date for its four-year plan so it could be identified as a programme drawn up by the government rather than one driven by the European Union or the IMF.

The newspaper said the plan would be published on Tuesday, citing unnamed senior Irish officials. A government spokesman said only the plan would be published early next week.

An international aid package is expected to be announced shortly afterwards.

"The cabinet will meet tomorrow to sign off on the 160-page document which charts how the state will reduce its outgoings," the Irish Times said, adding a separate plan for restructuring the bank sector was also expected to be finalised this weekend.

Sources have told Reuters that Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.

Systemic risk
Markets calmed in recent days after it became clear Ireland was on track to receive aid, but remained jittery on Friday.

The euro briefly pushed above $1.3720, but fell back to $1.3660 in late European trading. The spreads of Irish 10-year bonds above German benchmarks drifted down towards 5.4%age points before pushing back up to 5.6 points, dragging Greek, Portuguese and Spanish debt alongside.

ECB policymaker Lorenzo Bini Smaghi told the weekly Die Welt am Sonntag that the costs of any bailout could increase if Dublin needs financial aid but delays in asking for it.

"This risk in fact grows with time -- we have seen this already with Greece. There is also danger that contagion spreads to other highly indebted euro zone countries," he said.

"If the financial markets see that Europe is having a hard time to resolve a problem quickly, they could seek out a new victim," he added.

Britain repeated its readiness to help because of its strong economic links with Ireland and Sweden said it could help too.

"There could be some bilateral help. We are waiting to hear more from the Irish government," Swedish Prime Minister Fredrik Reinfeldt told RTE.

"We feel that we are very close to Ireland and are always ready to listen and help if we can do so," he said.

Funds for Ireland are likely to come from a safety net fund set up after the EU bailed out Greece earlier this year.

Prime Minister Brian Cowen's razor-thin parliamentary majority could be cut even further if, as expected, his Fianna Fail party loses a seat in a special election next week.

Support for Fianna Fail has fallen to 17%, according to a Sunday Business Post/Red C poll, a result that would cost the party more than half its MPs if repeated in a general election.

Union leaders said the public was already angry over the government's austerity cuts and any further measures to be announced on Tuesday could prove a tipping point.

"The talk now is of the budget, and effectively destroying the social welfare system. I think there is going to be huge civil unrest as a result of that," TEEU union leader Eamon Devoy told Reuters.

Unions plan a Nov. 27 protest march against austerity measures imposed to rescue the state's finances and one has called for a campaign of civil disobedience if the government fails to call an election.