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Financials

Public sector in firing line if Irish bailout sought

* IMF/EU would impose drastic cuts to public sector

* Deal protecting public sector pay may be ripped up

* Hike in corporate tax would be counterproductive

* Greece hikes VAT to 23 pct, Irish VAT at 21 pct

By Lorraine Turner

DUBLIN, Nov 16 (Reuters) - Ireland’s public sector workers face the risk of further wage cuts and redundancies and its “sacrosanct” low rate of corporation tax could be raised if Dublin seeks an international bailout, economists believe.

The European Central Bank and euro zone peers want Ireland to accept an aid package to prevent a destabilisation of the bloc but likely tough conditions attached would put Dublin on a collision course with trade unions and delay the economy’s emergence from the worst recession in the industrialised world.

An EU source said any aid would be from both Europe and the International Monetary Fund (IMF).

“They want to quarantine Ireland. They want to take out the Irish problem,” said Ray Kinsella, professor of banking and financial services at University College Dublin.

“IMF programmes are very drastic, particularly on the expenditure side. They will be looking particularly at the public sector in Ireland for savings.”

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For a factbox on possible budget measures click on [ID:nLDE6A71QF]

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Options for budget cuts in Ireland are limited by the fact it is facing its fourth austerity budget in just over two years, with some of the easier options already taken.

Prime Minister Brian Cowen is set to unveil later this month a four-year plan for squeezing 15 billion euros in fiscal adjustments and he had promised public sector unions he would not cut their wages again or force through job cuts as part of this austerity drive.

But with an annual gross public sector wage bill of 16 billion euros, despite pay cuts of up to 15 percent already introduced, and nearly 310,000 people on the payroll, the IMF and the EU may not be so kind.

Last year, a government-sponsored report said 17,300 jobs should be cut from the public sector but Cowen, with a possible parliamentary election looming next year, has not tied himself to any target and instead is hoping to achieve savings through voluntary redundancies and early retirement programmes.

If he reneges on his promise to the unions, demonstrations and strikes could follow.

TAX BREAK

Within government and business circles, the biggest fear is that Brussels will demand Ireland raise its ultra-low 12.5 percent corporate tax rate, described as “sacrosanct” by Irish officials for its importance in attracting foreign investment.

Craig Barrett, former chairman of Intel INTC.O, who brought the U.S. group to Ireland, said on Monday in Dublin that raising the tax was "a dangerous ground to tread on".

“There is always a tendency in difficult economic times to raise tax but usually raising tax has a perverse effect of stifling business rather than attracting business,” he said.

But Ireland’s low rate, which compares with around 33 percent in France and nearly 30 percent in Germany, has long been viewed with irritation in Berlin and Paris and a finance expert from German Chancellor Angela Merkel’s party said on Tuesday that it should be raised. [ID:nBAT005771]

An increase in VAT from the current high rate of 21 percent, despite being unpopular, may also feature on any bailout “must-do” list.

Portugal, which may be next in line to take the EU’s unpleasant medicine, is already planning 5 percent cuts to civil servant wages and a rise in its sales tax to 23 percent from 21 percent. [ID:nLDE6AE1HR]

Greece had to hike its VAT rate to 23 percent, from 19 percent at the start of the year, as part of austerity measures it agreed with the EU and the IMF.

Economists say that measures such as a property tax and flat-rate water charges would work effectively in Ireland, while trimming social welfare, child benefits, student registration fees, health and education budgets are on the cards.

But cutting spending on schools, roads and hospitals -- although an easy target -- is repeating the errors of the past.

“We did way too much spending when the economy was booming, but it’s also pro-cyclical when you cut, particularly capital spending too much in a recession, it’s exactly the time when you should be doing it from a macroeconomic perspective,” said Professor John McHale, Head of Economics at the National University of Ireland, Galway.

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