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* Ireland still on track to cut 2 bln euros in spending
* Bulk of cuts will come from public-sector pension levy
* Economists welcome proposals; unions angry
By Andras Gergely and Carmel Crimmins
DUBLIN, Feb 3 (Reuters) - The Irish government will introduce a pension levy on public-sector workers and freeze pay hikes to tackle its sky-high budget deficit and reassure international investors that its finances are under control.
Prime Minister Brian Cowen, whose approval ratings have nosedived as recession has gripped the former "Celtic Tiger" economy, said on Tuesday he would press on with plans to cut 2 billion euros ($2.57 billion) from public spending despite failing to win approval for the measures from trade unions.
"Today we are starting the fight back in bringing order to our public finances," Cowen said. "Without stable finances, there will be no economic recovery."
Economists praised the government's tough stance, which they said would give Dublin some breathing space from the threat of a ratings downgrade, but they warned it was only the first step.
"I think it will buy them some time. At least they have implemented something," said Alan McQuaid, chief economist with Bloxham Stockbrokers.
"But how they will take the next steps, I don't know. It's going to be a pretty painful exercise."
Credit ratings agencies, which last month warned Ireland risked losing its prized "AAA" status if it did not tackle its finances, told Reuters earlier on Tuesday that they would be monitoring the implementation of the spending cuts.
Standard & Poor's, which cut the ratings of fellow euro zone members Greece, Spain and Portugal in recent weeks, signalled that it was unlikely to make an imminent move on Ireland [ID:nL310447]
Moody's said Ireland still had room to manoeuvre. [ID:nL3689781]
A GAPING WOUND
Cowen wants to slash 14.5 billion euros from public spending between 2010 and 2013 and the government has warned that the budget deficit could reach between 11 and 12 percent of GDP for each year up to and including 2013 without such measures.
Even with this year's 2 billion euros in spending cuts, Ireland's budget shortfall this year will be 9.5 percent of GDP, more than three times the European Union's 3 percent limit.
"This is a 2 billion euros sticking plaster designed to cover a gaping wound that has not been treated at its roots," said Enda Kenny, head of the main opposition party, Fine Gael.
A severe and prolonged drop in the local property market and the global economic crisis have plunged one of Europe's once-brightest economic stars into a severe recession with Dublin now forced to borrow to cover a third of its day-to-day spending.
Exchequer figures for January revealed a deficit of 747 million euros as revenues from capital gains tax and stamp duty each plunged by nearly three quarters from last year. [ID:nDUB000806]
Cowen said the introduction of a pensions levy would save 1.4 billion euros this year and Dublin also plans to cut capital spending by 300 million euros. There will be reductions in Ireland's overseas development aid and childcare allowances. [ID:nDUB000805]
He said the government would postpone previously agreed public-sector pay increases, which would deliver savings of 1 billion euros in 2010.
ANGRY WORKERS
Unions said public workers would be angered by the pension levy, particularly as the government is expected to bail out the country's two main banks later this month using around 8 billion euros from the national pension scheme. [ID:nL2709752].
"There's going to be a very, very strong reaction to this government decision because it's going to very much affect the people who can the least afford to pay," said Blair Horan, general secretary of Civil Public & Services Union.
Teachers have already taken to the streets to protest cuts in education spending but economists said the risk of industrial action as experienced in other euro zone economies was low.
"Unions have no real bargaining power in the face of rising unemployment, so disruption in any significant way is unlikely," said Rossa White, chief economists at brokerage Davy.
($1=.7776 Euro) (Writing by Carmel Crimmins; Editing by Jonathan Oatis)