UPDATE 3-Ireland tests economy with latest dose of austerity
* Taxes up 1.2 bln euros ($1.6 bln), spending down by more
* Record majority see measures pass, reaction is key
* Ireland well on the road to recovery -finance minister
* Services sector, unemployment data help soften blow
DUBLIN, Dec 5 (Reuters) - The Irish government tested the economy and a long-suffering public with a new 3.5 billion euro ($4.6 billion) dose of austerity on Wednesday, though better service sector and jobless data helped soften the blow a little.
Bailed-out Ireland has made a limited return to bond markets and is one of few euro zone countries to keep eking out mild growth, but with one of the highest budget deficits in Europe, it has little option but to further cut spending and hike taxes.
New measures included a politically incendiary property tax at a time when one in six homeowners are struggling to pay their mortgages and the budget was greeted by some 1,500 protesters outside parliament, a small number of whom clashed with police.
Finance Minister Michael Noonan said the government's aim was to ensure the wealthy made a fair contribution, but the cuts will try the patience of people in a country which has so far avoided large-scale protests seen elsewhere in Europe.
Striking a more restrained tone than his predecessor Brian Lenihan who ended his 2009 budget speech by claiming the economy had turned a corner, only to seek an EU/IMF bailout within a year, Noonan nevertheless said the end was in sight.
"When I stood before the house last year, the Irish government was locked out of bond markets. Our 2-year bond yields were almost 10 percent," Noonan told parliament, delivering the country's sixth budget in little over four years.
"Now they are less than 2 percent. We have seen a total transformation in only 12 months ... We are now well on the road to recovery so let's look to the future with confidence."
The new measures come on top of 25 billion euros taken out of the economy since 2008, equivalent to 15 percent of annual output, although the rapid rate of services sector growth last month showed its ability to weather the cuts as well as Europe's downturn.
The services sector, which accounts for about 60 percent of the economy, grew at its fastest pace in five years while separate data on Wednesday showed that the jobless rate hit a 17-month low, helping to soften the budget blow.
With a record majority, the ministers had no problem pushing the first measures through parliament.
The broad thrust of the budget had already been agreed under the terms of Ireland's 85 billion euro EU/IMF bail-out, with 1.2 billion coming from new tax measures, and just under 2 billion saved through cuts to expenditure.
Noonan detailed the tax hikes, some aimed at wealthy pensioners, announcing cuts to capital gains taxes and pension relief, a hike in motor taxes and putting an extra euro of excise duty on a bottle of wine.
After tax receipts fell 0.5 percent behind target for 2012 following a big drop in November, he said the new measures would have a bigger carry over effect than originally pencilled in and almost halve the next round of required tax hikes in a year's time to 500 million euros.
His colleague, spending minister Brendan Howlin of the junior coalition Labour party, laid out cuts mainly to the large health and social protection budgets, cutting child benefit along with free health care entitlements.
"They've managed to come up with a budget that uses all tools and spreads the pain fairly widely. No individual cut is really very drastic," said Philip Lane, economics professor of at Trinity College Dublin.
"Ireland is taking a very gradual approach to austerity, it's not like they are trying to get down to zero very quickly. It's sizable but the bottom line is still that there's a huge amount of borrowing."
Noonan reiterated that Dublin would trim its budget deficit to a better-than-expected 8.2 percent of gross domestic product (GDP), a still-high level that puts it under extra pressure to hit growth targets that also remained unchanged.
Political analysts said that while it may be risky to target well-off pensioners after Ireland's elderly forced the government to drop plans to means-test medical allowances four years ago, similarly sized demonstrations were unlikely to be repeated this time.
However with unemployment close to a crisis high at 14.6 percent, the property tax sure to be unpopular and Dublin under pressure to strike a deal with Europe to ease the burden of an expensive bank bailout, the government cannot take the public's patience for granted.
"I can't afford to pay the property tax and I'll go to jail before I'm forced to pay, it's as simple as that," said Tom Busteed, a pensioner who travelled from the southern county of Cork to protest outside the gates of parliament.
"It should be equal cuts for everybody, but that's not what's happening."
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