Ireland cut its growth forecast for next year and fleshed out 1 billion euros (875 million pounds) worth of fresh tax measures on Tuesday under the shadow of a euro zone debt crisis that threatens to derail its fragile recovery and force even more austerity on its recession-weary people.

Finance Minister Michael Noonan cut his outlook for gross domestic product (GDP) growth next year to 1.3 percent from 1.6 percent, the second downgrade in a month, as the risk of a euro zone recession darkens the outlook for export growth and puts Irish consumer spending on course for a fifth straight year of decline.

Noonan said the budget deficit target for this year was still on track but if the growth outlook deteriorates further it could force him to push through even harsher austerity budgets in 2013 and beyond if Dublin is to meet its goals under an EU-IMF bailout.

No matter what happens in the wider euro zone, Ireland needs to restore sustainability to its public finances, Noonan told a packed lower chamber.

If the euro zone crisis recedes, we are amongst the best placed to grow quickly, as evidenced by the EU Commission's growth forecasts. If the euro zone crisis persists, it is equally important for the state to reduce our dependence on borrowing.

He later said a swift resolution to the crisis could prompt an upgrade to the 2012 outlook. European leaders will take part in a summit on Friday but quick solutions are not expected.

Standard & Poor's warned it could cut Ireland's credit rating as part of a mass euro zone downgrade, leaving it one level shy of junk status, if Europe does not deal with its financial problems. The euro zone's rescue fund, which Ireland relies on for funding, is also at risk.

Until this week, S&P had been the most positive of the three main rating agencies on Ireland, rewarding its government with a stable outlook in August for its efforts in tackling the biggest budget deficit in the industrialised world and a banking meltdown.


The new growth forecast is more realistic, but I still think it is too high considering what is going on. Falling growth will make it much harder to hit targets. Whether they will have to introduce additional austerity measures in 2012 remains to be seen, said Alan McQuaid, economist at Bloxham Stockbrokers.

At the end of the day this is all secondary. Our future will depend on what happens at the euro zone summit on Friday. If the euro survives and the debt issues are resolved, it will make our debt targets more achievable. Bad news for Europe is bad news for us.

Noonan's tax plans, which come on the heels of 2.2 billion euros in spending cuts announced on Monday, were largely known after Reuters obtained details of the budget in documents given to German lawmakers last month.

The centre-piece of Noonan's tax plans are a 2 percentage point increase in the top rate of sales tax, which will raise 670 million euros as it is applied to around half of all goods and services. The new 23 percent rate is the highest in the euro zone, along with Greece, Portugal and Finland.

The remaining 330 million euros in tax revenues will be generated from indirect taxes including higher capital gains and capital acquisitions taxes and a new 100 euros a year household charge, the sixth new tax introduced in the past three years.

In addition, some 600 million euros will be generated from tax measures carried over from last year.

Notably, the plans did not include any change to Ireland's low corporate tax, a source of friction with its fellow euro zone members, or any more hikes in income tax.


The government announced a range of measures to try to revive the property market, which has been in freefall since 2007 and is a major drag on domestic demand, the banks and the public purse.

In addition to cutting stamp duty on commercial property sales and extending mortgage interest relief, Noonan scrapped plans to retrospectively ban upward-only rent reviews due to fears of legal challenges.

Noonan said he was appointing a group to advise on a future strategy for the state-run National Asset Management Agency (NAMA), which took over risky land and development loans with a face value of nearly 75 billion euros from the banks and is losing money due to a continued drop in Irish property prices.


Noonan offered targeted support for the export sector, the only hope for growth in Ireland's trade-dependent economy, and offered some relief for low-income earners by exempting them from a social charge.

But overall, Irish people, particularly larger families, students and the less well-off, have been hit yet again and the country, in austerity mode since 2009, still has years of fiscal pain ahead.

Ireland's success in achieving nearly 21 billion euros in austerity measures, equivalent to around 13 percent of GDP, without any social unrest has earned it plaudits from its creditors at the EU and IMF.

But if Noonan has to squeeze more than a planned 12.4 billion euros out of the economy between 2012 and 2015, it could stretch the patience of the public and backbenchers.

The government, which still has a record majority and will comfortably pass the 2012 budget, lost its fourth member on Tuesday when a member of the junior coalition party Labour said he couldn't support the cutbacks.

Over the next couple of years, the problem is there are going to have to be more and more of these budgets and we are going to get closer and closer to the really critical red line issues for both of these parties, said Theresa Reidy, a politics lecturer at University College Cork.

(Additional reporting by Conor Humphries in Dublin and Nia Williams in London)