Britain can afford billions for Irish bailout, Osborne insists

Mr Osborne has signalled that the British contribution to an international bailout package for Dublin is likely to be around 7bn. MPs will have a vote on a bilateral loan to be offered alongside a wider deal being drawn up by the European Union and the International Monetary Fund (IMF), he confirmed.

But Britain is also tied in to an European Union mechanism that would leave it liable to pick up the bill if Ireland defaulted on loans guaranteed against the Brussels budget. Mr Osborne said that was "highly unlikely" to happen – but was warned by MPs of public anger at taxpayers' cash being used to prop up a foreign economy at a time of cuts at home.

The Chancellor's defence of the British intervention came as Ireland was plunged into a political crisis to match the chaos of its economic problems as its Green Party demanded a General Election by the New Year.

In a sensational twist, Green leader John Gormley signed the Irish Government's death notice on day one of delicate negotiations with the IMF and Europe.

Environment Minister Mr Gormley demanded a general election by the second half of January as he attacked the spin machine behind the senior coalition partner Fianna Fail, and accused strategists of last week ordering the Greens to toe an official line on how dire the Irish economic crisis had become.

"We were given an official line ...which was essentially a mixed message," he said.

The shock election deadline was set the day after Mr Gormley and Green communications minister Eamon Ryan sat with Cabinet colleagues for several hours working out how to approach the IMF/EU for up to 90 billion euro (77bn) in loans.

Relations in the coalition had degenerated so far that the Taoiseach Brian Cowen was only issued with the ultimatum minutes before the Greens made it public in Leinster House, Dublin.

The threat quickly prompted calls from the opposition and two Independent MPs for an election.

The Irish Government has faced damning criticism, calls for resignations and warnings of distrust among the public over the last week after initially insisting there were no talks with the IMF before conceding a loan might be needed and ultimately asking for one.

Speculation is intensifying Mr Cowen's beleaguered government may not even make it to the New Year, with a razor-thin majority to pass the worst Budget in the state's history next month and a byelection on Thursday.

Last night Mr Cowen refused to bow to public and political pressure for a general election.

The Taoiseach said the most important thing for Ireland was the passing of the crucial six billion euro (5bn) savings in Budget 2011 on December 7 but he said he would seek the dissolution of the Dail (parliament) when legislative actions have been taken – the passing of Budget 2011, the publication of a four-year fiscal plan and confirmation of bail-out loans from the International Monetary Fund (IMF) and Europe.

In the Commons, Mr Osborne sought to soothe furious Tory eurosceptics.

"This is a loan that we can afford to make and will get back," Mr Osborne said, adding it was "overwhelmingly in Britain's national interest" for a major trading partner with an "interconnected" banking sector to have a stable economy and banking system.

"Ireland is a friend in need and we are here to help," he added.

In London, where the FTSE 100 Index finished down 52 points at 5680.8. Shares in Royal Bank of Scotland, seen as being the most vulnerable in terms of Irish lending through its Ulster Bank subsidiary, fell nearly five per cent, down 1.9p to 39.8p.

Income tax likely to be increased

Under the bailout scheme, income tax will increase but Ireland's controversially low 12.5 per cent corporation tax – which has enabled the country to pull in hi-tech multi-nationals at the expense of their neighbours – has been dubbed a red-line deal-breaker by the Government and will not be touched.

Little other detail has been revealed by the Government, Taoiseach Brian Cowen and Finance Minister Brian Lenihan being reluctant to name their price. They also refused to be drawn on debt levels the country is facing, how long loans will run for or if money will be drawn down by banks for certain.

Ireland's state running costs are 19 billion euro (16.3bn) in the red.

But the deepening crisis has been in the banks, with about 23 billion euro (19.7bn) of deposits shifted out of Ireland this year and the state has been hit by prohibitive borrowing rates on the international markets.

An asset sell-off in the banks may also be looked at under the terms of the deal.

The plan has the backing of the IMF, the EU, G7 countries and Britain and Sweden, who are also lining up bilateral aid.

In the meantime, the Government will push ahead with its Budget roadmap to recovery early this week.