Europe Economy

Ireland’s latest austerity cut: Its government

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Ireland is set to enact the most fundamental change to any bailed-out country's political system since the euro zone credit crisis began.

Its population is expected to vote to abolish the Seanad (Senate), Ireland's upper house of the Oireachtas (parliament) on Friday. Bookmakers Paddy Power were offering odds of 1-7 that the Seanad would be abolished Thursday morning.

The abolition comes as Ireland's government is declaring a tentative victory over the economic crisis in the country, which is due to become the first bailed-out euro zone country to exit bailout in 2014.

On Wednesday, Finance Minister Michael Noonan indicated that the government may loosen its belt on austerity measures. He said that the adjustment in Ireland's next budget, due October 15, will be "somewhat less" than the 3.1 billion euro Ireland's creditors have asked for.

"The government should not have divulged from the 3.1 billion euro plan," Philip O'Sullivan, chief economist at Investec Ireland, told CNBC.

"Ireland has got a lot of kudos from the market for repeatedly beating targets, but statements like this are playing chicken with the market."

He added that the withdrawal of troika financing could weigh more heavily than expected when Ireland returns to the bond markets.

While Ireland's economy has performed better than expected on some fronts, there are still a few issues worrying markets. One is the gap between day-to-day revenue and spending. Another is the country's dependence on foreign exports. Slightly weaker than expected GDP numbers could weigh on the headline deficit.

(Read more: Is Ireland really a class apart from other bailed-out countries?)

There are also concerns that the legacy of the collapse of Anglo Irish Bank will turn out to be more of a drag on the exchequer than previously thought. Recordings released earlier this year revealed that, when asked to come up with a figure for bailing out the bank, one former Anglo executive said he had "picked it out my arse".

Cutting the Seanad is expected to save 20 million euros in government spending. Taoiseach (Prime Minister) Enda Kenny promised to abolish the section of parliament, which is composed of people nominated by the political parties and Irish universities rather than elected directly by the Irish people, as part of his election campaign.

Ireland has been helped in its recovery by a lower corporation tax rate than most of the euro zone, which has led to companies like Apple relocating some of their business there.

(Read more: Bono defends Ireland's low taxes)

The occasional difficulties of having two houses of government may be illustrated by the gridlock in the U.S. at the moment. The Seanad, which is only able to delay rather than veto laws, is viewed by opponents as a place for the government to put its cronies. However, its proponents argue that it helps provide a necessary check on laws from the Dail, Ireland's lower house of parliament.

This is part of a general slimming-down of government in Ireland in response to the credit crisis. The country has already shut down some small local councils.

- By CNBC's Catherine Boyle. Twitter: @cboylecnbc.