Public sector salaries slashed by between 5% and 20%!
That was a tough budget! Admittedly there were no increases in direct taxation, but there was a new carbon tax on fossil fuels, and just look at these cuts:
- public sector salaries slashed by between 5% and 20%;
- Jobseekers' Allowance reduced; and
- Child Benefit scaled back.
I'm not referring to Wednesday's pre-budget statement by Alistair Darling, but to Ireland's budget, also announced on Wednesday. Ireland's tax year corresponds to the calendar year, which is why they have a full budget in December, although this year they also needed an emergency mid-year budget in response to the financial crisis.
So there's no need to panic if you're a British public sector worker reading this... or at least no need to panic yet.
But what effect will these cuts, and the ongoing economic problems in Ireland, have on Irish companies trading on the London market? For what it's worth, the market appears to have taken the budget in its stride, which is understandable given that the main proposals were leaked well in advance, so none of this was a big surprise.
Banks
The only big casualties in recent days were the banks, and their falls were driven more by a downgrade on Tuesday by Fitch. The credit rating agency cut the short-term ratings on both Bank of Ireland (LSE: BKIR) and Allied Irish Banks (LSE: ALBK) by one notch, from F1+ to F1, its second-highest rating. Their shares in both are down about 10% since close of business on Monday.
Both of these banks were heavily exposed to Ireland's property boom, and subsequent bust, and are now 25% owned by the taxpayer.
Industrials
Ireland's larger industrial companies are less dependent on the Irish market, which is actually very small -- the population of Ireland is lower than the combined populations of Greater Manchester and West Yorkshire, for example. So a company like CRH (LSE: CRH), one of the world's largest building materials companies, derives only 5% of its sales from its home country.
It's a similar story at food and ingredients maker Kerry Group (LSE: KYGA), whose UK brands include Wall's, Mattessons, Richmond, and Dairygold. And while Aer Lingus (LSE: AERL) is mainly serving the Irish market, Ryanair (LSE: RYA) has a much more international presence.
Of major importance to all these companies is Ireland's corporation tax rate of 12.5%, which was one of the drivers of economic growth since the 1990s; Irish companies can take some comfort from the fact that the government is committed to retaining this rate. But the country will undoubtedly face some tough years ahead as it makes the necessary cuts to government spending.
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