The Irish Government will increase VAT from 21% to 22% in 2013 as part of its austerity package to cut its huge deficit.
VAT will rise again in 2014 to 24% as part of a four-year plan designed to save the state €15bn.
The recovery plan also includes 24,750 public sector job cuts and a reduction in the minimum wage by €1, to €7.65 an hour.
The plan will cost Irish taxpayers €20 a week.
Taoiseach Brian Cowen said he hoped the plan would “bring certainty to our people to make sure they have hope for the future”.
The Irish government is also negotiating a bail-out package with the European Union and the International Monetary Fund, expected to be worth about €85bn.