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‘How are we supposed to deal with this?’

Ireland's drastic budget cutting has put it on the front lines of a global battle against runaway government spending, prompting some to ask if the United States will follow suit.
/ Source: a href="" linktype="External" resizable="true" status="true" scrollbars="true">The Washington Post</a

Is this the ghost of America's future?

Like other heavily indebted nations around the world, Ireland is borrowing vast sums from foreign investors to plug its budget deficit. Fearing that the country will buckle under the weight of so much debt, the Irish have an answer: Put the government on a diet.

More than $4 billion in cuts coming into effect after New Year's Day will slash salaries for 400,000 government workers while making painful reductions in benefits for such groups as widows and single mothers to the blind and disabled children. A tax targeting rich Irish nationals living overseas — dubbed the "Bono Tax" in the Irish press — will help restock empty coffers at home. Even Prime Minister Brian Cowen, who earns about as much as President Obama, is taking a 20 percent pay cut.

Such drastic steps have put Ireland on the front lines of a global battle against runaway government spending and exploding budget deficits in the wake of the financial crisis. The world's richest nations, according to the Organization for Economic Cooperation and Development, are more indebted than at any time in at least the past 50 years.

Budget deficits in the world's industrialized nations have more than tripled during the financial crisis. Nations have injected huge amounts into bank bailouts and stimulus packages, even as tax collection has collapsed. With borrowing still soaring, the OECD projects that by 2011, wealthy nations could owe investors more than the value of their gross domestic product.

"Stopping the rot is clearly necessary and will call for fiscal consolidation that is substantial in most cases and drastic in some," the OECD said in a recent report.

Tough choices
The Irish solution illustrates the tough choices ahead for countries in debt, particularly smaller, troubled nations such as Greece where analysts fear the eruption of a payments crisis if difficult steps aren't taken to control government spending. But in the longer term, analysts warn, even larger, wealthier countries now borrowing record amounts — most notably the United States — may impose difficult cuts to bring deficits back down to already high pre-crisis levels.

Although ramped-up spending is credited with helping spark the global recovery, failure to draw down that spending — starting as early as late 2010 in some countries, analysts say — risks triggering higher interest rates and the tipping of economies back into recession. The timing of cuts is among the most contentious issues dividing Democrats and Republicans on Capitol Hill; fiscal conservatives support swift reductions, and proponents of spending argue that moving too quickly could derail the economic recovery.

Eventually, however, Americans will probably feel the sting of cuts, even if they are phased in more gradually than the pull-the-Band-Aid-off-fast method being rolled out in Ireland.

"The U.S. government, like the U.K. government, the Greeks and the Irish, is going to need to draw down fiscal stimulus, pare expenditures, raise revenues and probably take a look at [cuts] in their entitlement programs" such as Social Security, said John Chambers, chairman of Standard & Poor's sovereign rating committee in New York.

The Irish offer a glimpse into just how hard that rollback can be for citizens who have come to count on government help, particularly as public assistance funds soared in many nations during the boom years.

In Saggart Abbey, a suburban village outside Dublin, Susan Byrne and her husband spend most available time indoors, caring for their two teenage daughters. Both girls are severely autistic; one is virtually mute. The couple this year received about $32,000 in government assistance, largely through special caregiver benefits. That sum is about to be reduced by about $1,700 a year.

The cuts, Byrne said, could not have come at a worse time. With Ireland facing a U.S.-style housing bust after years of speculative building, the salary of her husband, who sells house paints, has been cut in half over the past year.

The Byrnes are struggling to make payments on the house they bought during the boom years, which, as with many Americans, is now worth less than what they owe on it. The government cuts, she said, mean the family will need to drop the one treat they have tried to cling to even in rough times — a weekly trip to McDonald's.

"I feel pushed as far as I can go, ready to cry," Byrne said, looking down at her accounting ledger on the family's kitchen table. "You might not think it's a lot of money to lose, but it makes a huge difference to us now that we're down. I know they say that Ireland can't afford it. But how are we supposed to deal with this at home?"

Yet the Irish know something about the price of running up a tab you can't pay back. A mountain of debt and a failure of political will to make difficult cuts, officials here say, were major contributors to the "lost decade" of the 1980s. The time was marked by near-zero net growth, soaring interest rates and mass emigration of Irish as unemployment climbed to nearly 18 percent.

"In the 1980s, we saw what can happen when you ignore the problem of overspending," said Alan Ahearne, a special adviser in Ireland's Finance Ministry. "We're not going to make that mistake again."

An increase in spending through stimulus, economists argue, also would not bring the economic benefits it has brought the United States, largely because tiny Ireland imports the vast majority of its goods and services from neighbors. "Stimulus spending in Ireland would just be exported overseas," Ahearne said.

In part, the Irish are making cuts to shore up investor faith in government bonds, which have taken a beating in recent months as fears of a brewing international debt crisis have spread.

Economic penance
To date, the Irish are taking news of the sharp cuts with surprisingly little protest. Though union leaders are threatening strikes in coming weeks, no one expects the kind of violent unrest that may confront, say, Greece if it follows through on a pledge to make similar cuts.

Many Irish seem to view the cuts as cathartic, surrendering to a view that they deserve to suffer after buying in so completely to the reckless, credit-fueled growth of the late 1990s and 2000s. As the Irish seek penance for their excesses, they are gobbling up self-flagellatory bestsellers such as Fintan O'Toole's "Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger."

Yet some have criticized the government for what they view as a thinly veiled message encouraging members of a new generation of Irish to set forth overseas to find their fortune, as many of their parents, grandparents and great-grandparents did. The new cuts specifically target Irish 20-somethings who cannot find work, reducing their unemployment benefits, in some cases, by as much as 30 percent.

Analysts say thousands of young Irish have left for Britain, North America and Australia in recent months, with thousands more expected to emigrate next year.

"I feel like the government is telling us that Ireland can't support us anymore and we should take our chances elsewhere," said Shaun Kavanaugh, 25, an unemployed electrician. "I'm taking the hint. As soon as I save up enough money for my flight to Canada, I will be on that plane. I thought those days were over in Ireland."