By Andras Gergely
DUBLIN (Reuters) - Ireland's Prime Minister fought off domestic criticism of his government's 4 billion euros (3.6 billion pounds) in budget cuts on Thursday, even as the moves appeared to somewhat calm debt markets rocked by worries in other struggling euro zone economies.
Analysts said the budget, which slashed between 5 and 15 percent off public sector wages, in reality was still just the start of a process that must see substantial further cuts in public spending and deflation to make Ireland more competitive.
"The assertion made by (Finance Minister Brian Lenihan) that we have turned the corner and that the worst is over does not sit that comfortably," Friends First Chief Economist Jim Power wrote in a column for the Irish Examiner newspaper.
"While we saw no meaningful changes in direct taxation, there is a promise of considerably more pain."
Economists say Ireland's task, after it paid billions to deal with the collapse of its property boom, may now look more like the "internal devaluation" facing Latvia, Estonia and Lithuania than a straightforward righting of public finances.
Data published on Thursday showed consumer prices fell 5.7 percent in November from a year earlier compared with a 6.6 percent fall in the year to October. [ID:nDUB003144]
"The reduction in social welfare payment rates is less than the fall in prices," Prime Minister Brian Cowen told parliament, still citing October's CPI fall of 6.6 percent. "The value of the payments in people's pockets will, if anything, be higher than it was previously."
The economy is set to shrink around 8 percent this year, one of the deepest recessions in the developed world.
Ireland is also locked into the euro, leaving the only answer to its woes a painful process of cutting wages and reducing prices to offset the euro's gains and reboot its ultra-open economy. Property prices have already halved.
"This is hard for all of us," Lenihan said.
"But this country could have become insolvent in the last year. The government is not in a position to keep paying nominal rates while everyone else's cost of living is falling."
POLITICAL PRESSURE BUILDS
Analysts were impressed by a budget which made good on all of the 4 billion in savings that Lenihan had promised financial markets in a bid to set it apart from other struggling euro zone states like Greece.
The premium investors take to hold Irish 10-year government bonds instead of German Bunds had earlier widened to 198 basis points, hit by a sell-off in debt of the euro zone's smaller issuers, rocked this week by negative ratings signals for Spain and Greece.
However, the spread later fell to around 180 bps in a volatile session in European debt markets.
Ireland has also seen its debt rating fall but Fitch Ratings said ahead of Wednesday's budget that it saw reassuring signs in the government's plans.
Lenihan said the borrowing need would fall to below 20 billion euros in 2010 compared to the 35 billion that was raised this year. But market players said none of that was enough.
"Given the overall sentiment, the budget hasn't done enough to offset that," said John Davies, strategist at WestLB.
The first handful of votes on the budget's measures on Wednesday night all went the government's way, but it faces more sensitive votes on welfare cuts in the days ahead and the prospect of fresh strikes by unions against the measures.
"We could decide in February after the measures are imposed that we say today's the day we stop working and we don't start again until some resolution emerges," Irish Congress of Trade Unions (ICTU) president Jack O'Connor told Newstalk radio.
Questioners on a radio call-in tore into Lenihan for making cuts in unemployment benefit, healthcare and child benefit.
"How does it feel to be a champion of the rich and powerful," one listener asked Lenihan. "Shame on you."
Cowen's majority in parliament is razor-thin, but many opposition deputies stayed away from Wednesday's votes when a defeat would have forced the government to resign.
Analysts say the centre-right Fine Gael party -- holding a huge lead in opinion polls -- is in no rush to push the government out when there is little sign the economy will pick up much before an election normally due in 2012.
(Additional reporting by Ian Chua and Padraic Halpin; Writing by Patrick Graham; Editing by Toby Chopra and Victoria Main)
