* Irish deficit seen 12.75% pre budget, worst in EU
* Government under pressure to reassure voters, investors
* Tax system to be redesigned after property bubble burst
* Broad outline of plan for banks' bad debts to be unveiled
By Andras Gergely
DUBLIN, April 3 (Reuters) - Ireland's government will outline its strategy for dealing with the worst public finances in Europe on Tuesday in an emergency budget that will shape the country's economic fortunes and its own political future.
Investors, euro zone colleagues and the electorate hope Finance Minister Brian Lenihan can convince them Dublin will make good on a promise to get the deficit under control by 2013.
Ireland's financial troubles, which led Standard & Poor's to cut the country's prized AAA rating on Mar. 30, have fed doubts about how well the 10-year-old euro bloc is equipped to handle such fiscal strains. Lenihan has called talk the euro zone might break apart and Ireland give up the euro "absurd".
The ruling Fianna Fail party must also convince voters that the pain of austerity measures is fairly distributed to assuage widespread anger over its handling of the rise and fall of the easy credit "Celtic Tiger" economy.
Lenihan has warned the deficit could hit 12.75 percent of GDP this year, easily the highest in the European Union and more than four times an EU limit of 3 percent, unless action is taken.
"The government still has the budget to get things right," said Theresa Reidy, who lectures in public finance at University College Cork. "But if it doesn't go well, it will lead to further political and economic instability that would only be solved by a general election."
A general election is not due until 2012, but an earlier poll may become necessary if the April 7 package, the second emergency budget in six months, is not approved.
When Standard & Poor's cut Ireland's rating, it signalled the country would need a new government to push through unpalatable spending cuts and tax hikes and warned the rating could be lowered again if conditions worsen.
While 100,000 people protested in February against cutbacks and bailouts for bankers, recent polls show that voters do not want the distraction of a general election and are prepared to take some pain provided the medicine is doled out equitably.
"We can do all the complaining we want about where things went wrong but if we want to build the government coffers back up we have to dig out," said Philip Scully, 30, who works at Glaxo Smith Kline.
TAKING THE HIT
Ireland's deficit ballooned to 3.7 billion euros ($4.9 billion) in the first quarter of this year, a tenfold increase on 2008 as tax revenues that had been inflated by a property market bubble shrank by nearly a quarter.
Lenihan and Prime Minister Brian Cowen have signalled they need to shave at least 4.5 billion euros off the budget.
Previous steps were partly overshadowed by a slew of banking scandals and criticised for being piecemeal and insufficient.
Cowen has said he will broaden the tax base, which excludes large numbers of low wage earners, and raise income tax rates.
But he must also avoid further damage to an economy that the government now expects to contract by 6.75 percent this year, the second straight year of recession and the worst on record.
The government is also expected on Tuesday to outline its plans for dealing with the banking sector's bad debts.
Economists, while agreeing that a broader tax base and a credible banking plan are crucial, have called for Dublin to focus on slashing current expenditure such as social welfare payments, child benefit and the public sector wage bill.
A fall in consumer prices makes these cuts workable on paper and together with a convincing medium-term plan could reduce Ireland's funding costs on international debt markets. Analysts hope the electorate will see the bigger picture.
"Throwing governments out does not solve problems, taking the hit does solve them," said Bernard McAlinden of NCB Stockbrokers in Dublin.
(Additional reporting by Padraic Halpin and Carmel Crimmins; Editing by Carmel Crimmins/Ruth Pitchford)