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Post-bailout Ireland looks for tax cuts

Jamie Smyth in Dublin and Peter Spiegel in Brussels
Joe Cornish | Stone | Getty Images

The Irish government hopes to use its new-found economic freedom to cut income taxes on its austerity-fatigued people signalling Dublin plans to shake up its fiscal policy after exiting its three-year bailout this weekend.

"Even when things were at their worst in the last three years we reduced some taxes," said Michael Noonan, Ireland's finance minister. "We see tax as an instrument of economic policy and the same approach will be followed when we look at income tax in the next two budgets."

Ireland will become the first euro zone country to exit from an international bailout on Sunday, a hugely symbolic moment. Mr Noonan said Ireland was recovering from its worst economic catastrophe since a famine in the 1840s when 1m people died.

Dublin hailed the imminent restoration of economic sovereignty to Irish politicians as a "milestone moment" on the road to its recovery. European authorities are also portraying Ireland as a victory for their controversial euro zone crisis management.

(Read more: Ireland is picking up Europe's bar tab: Ganley)

José Manuel Barroso, the European Commission president, on Friday said the Irish exit "sends an important message – that with determination and support from partner countries we can and will emerge stronger from this deep crisis."

Irish finance minister: 'Great sense of achievement'

At an event to mark Ireland's formal exit from the European Union and International Monetary Fund bailout, Mr Noonan heaped praise on the Irish public for stoically enduring 28 billion euros ($38.46 billion) in spending cuts and tax hikes – equivalent to 20 percent of the value of the Irish economy – following its financial crash.

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"The real heroes and heroines of the story are Irish people, who've had their taxes increased, they've had their services cut drastically – some of them, particularly public servants, have had very serious pay cuts," said Mr Noonan as he signalled that tax cuts were likely next year.

Dublin wants to cut income tax rates to stimulate economic growth and job creation. It follows warnings from Ireland's state investment agency, IDA Ireland, that high levels of personal taxation are threatening future foreign investment- a key sector of the economy.

Ireland's marginal income tax rate has increased sharply from 43.5 percent in 2008 to 52 percent for salaried workers now, which is the 10th highest of 34 OECD countries, according to the Irish Tax Institute.

But proposing income tax cuts even before it formally exits the bailout could raise concerns among Ireland's international lenders, which have provided 67.5 billion euros in loans to keep Dublin afloat since its banks collapsed in 2008-9.

(Read more: 'Sense of achievement' as Ireland leaves bailout)

Ireland's economic recovery remains fragile with a budget deficit of 7.5 percent of gross domestic product, growth forecast at 2 percent next year and public debt forecast to peak at a dangerously high level of 124 percent of GDP in 2014.

The Irish Fiscal Advisory Council, a budget watchdog set up after the financial crash, recently warned Dublin there is no room for income tax cuts until after 2016.

But Mr Noonan brushed aside concerns that such cuts would amount to a return to the boom-bust policies that got Ireland into trouble. "We can't go mad again, even if we had the resources," he said.

Mr Noonan said there may be room to cut income tax without reducing the overall take by stimulating growth and jobs creation.

Doubts still remain over Europe's approach to the euro zone crisis in spite of Ireland's relative success. In the new year, Brussels will face a series of challenges that raises questions about whether Ireland is a harbinger or an exception to the rule.

(Read more: New Ireland exits bailout: Mission not quite accomplished)

Greece is expected to receive a third bailout next summer, despite 240 billion euros in international aid, and Portugal may need a second rescue before its program ends in May.

Slovenia is struggling to avoid becoming the sixth euro zone country to need international assistance, announcing this week it would pump 3 billion euros into its banking system to fill a capital shortfall of nearly 4.8 billion euros.

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