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There were protests outside the parliament while the budget was being announced

The Irish government has presented the toughest budget in the Republic’s history to parliament, with the first key vote on it set for this evening.

Finance Minister Brian Lenihan unveiled a shake-up of the income tax system and hefty benefit cuts in his 2011 budget.

“This budget is every bit as bad as we feared,” said Eamon Gilmore, leader of the opposition Labour Party.

But despite the Fianna Fail/Green party coalition’s slim majority, the 2011 budget is expected to be passed.

The 6bn euros (£5bn; $8bn) of cuts in the 2011 budget are part of the four-year 15bn-euro austerity plan designed to bring the country’s deficit under control.

Mr Lenihan confirmed that the current deficit stands at some 19bn euros – ignoring the huge losses the government made bailing out the country’s banks.

If the budget is cleared by parliament, it will trigger the first tranche of bail-out funds from the EU and IMF.

Among the cost-saving measures announced by the minister were:

a plethora of benefit cuts included a 10 euro per month cut in child benefitlower income thresholds for the standard rate of income taxacross-the-board cuts to tax credits, and phasing out of property-related tax reliefsa single and more expensive “social levy” combining health insurance and social securitya 4% cut in current pensions for public sector pensioners.

The finance minister called the Irish income tax system “no longer fit for purpose”, pointing out that more than 45% of people are exempt from it.

Departmental spending cuts of 2bn euros were detailed, with the biggest savings to be made in the health and children, and social protection ministries.

Mr Lenihan also announced further pay cuts for ministers – including the Taoiseach, Brian Cowen – as well as the Irish President alongside a 250,000-euro pay cap on public sector pay.

“The scale of this adjustment is demanding, but it demonstrates the seriousness of our intent,” said Mr Lenihan in his opening remarks to the Dail.

He said that the Irish economy was already showing signs of recovery, and he expected growth to continue over the coming years, driven by exports.

Mr Lenihan defended the government’s decision to rescue lenders to Ireland’s insolvent banks

“It is the government’s strong view that the economy can continue to grow while we carry out the… National Recovery Plan,” said Mr Lenihan.

But rating agency Standard & Poor’s – which cut the Republic’s credit rating last month – said it expects virtually no growth over the next two years.

“The headline message is the numbers in the budget remain extremely optimistic about economic growth,” said Neil Gibson, economic advisor at accountants Ernst & Young.

He thinks that the budget cuts could lead to slower growth, which would in turn worsen the government deficit.

Michael Noonan of the main opposition Fine Gael party doubted the government would achieve all of the planned budget savings, and told the Dail that his party may have to introduce a further emergency budget in 2011, if it wins elections due in the New Year, as expected.

Meanwhile, Mr Lenihan said the government would seek to boost growth further via an investment programme equal to 3.6% of the country’s economic output.

He added that the state pension funds would also invest in public-private infrastructure projects.

In his speech, Mr Lenihan defended the government’s decision – agreed with EU negotiators – to spare the major creditors to the country’s banks from any losses on their loans.

It was a collapse in confidence in the Irish banking system in November that triggered the Republic’s bail-out.

He said the Irish government could not renege on its commitment to the banks “against the wishes of our European partners and European institutions”.

The decision to spare the banks’ lenders is thought to have been insisted on by the European Commission and European Central Bank – but not the IMF – as they feared that failing to do so would trigger a Europe-wide banking crisis.

But many in the Republic have been angered by the decision, which leaves Irish taxpayers footing the bill for saving the Irish banks.

“The real tragedy is that having done all this damage, [the main government party] Fianna Fail risks compounding their earlier mistakes, such as the blanket bank guarantee… with a budget that takes an additional 6 billion euros out of the economy,” said Mr Gilmore of the Labour Party.

Mr Cowen, with his poll rating at a record low, needs to push the budget through to avoid having to call a snap election.

A protestor was arrested earlier after arriving with a crane covered in slogans

Mr Cowen’s government only has a majority in the Dail, or lower house of parliament, thanks the support of two independent MPs.

One of these MPs, Michael Lowry, pledged his support for the budget on Monday evening.

According to reports, the other independent MP, Jackie Healy-Rae, is expected to follow Mr Lowry’s lead.

And it is not clear if all opposition MPs will oppose the budget. There has been talk of some MPs abstaining from the vote, strengthening Mr Cowen’s hand.

Opposition parties have published their own budget proposals ahead of a general election next year.

But with stringent EU/IMF fiscal targets to hit, most politicians accept that there will be little scope to deviate greatly from the plans being set out.

But it is not essential that all parts of the budget are cleared on Tuesday.

The vote will be conducted via four separate ballots, and the budget must be passed within four months of Mr Lenihan presenting it to parliament.

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