Ireland’s budget balancing hurts economy

Ireland suffers from problems familiar to British policymakers: a housing downturn, troubled banks and an economy overexposed to consumption. The policy response has been starkly different.

Last Autumn, at the height of the financial crisis, the Labour Government launched a fiscal stimulus despite falling tax revenues. The Irish responded in the opposite manner by cutting back spending and raising taxes. The country has had two emergency budgets in the past year. Both direct and indirect taxes have been raised and public sector pay cut. These moves were praised by Guido Fawkes at the time. In essence they represent the views of George Osborne and David Cameron who today said:

“we opposed the VAT cut and warned about the scale of borrowing … bringing down the deficit is not an alternative to long-term economic success, it’s a vital part of it.”

Nearly one year on, what has been the effect of these polices? Irish GDP is expected to fall by 12%, a staggering decline. Unemployment has reached 12.4% and is still rising. The economy is now in the grip of a severe deflation (minus 5.9%). Finance Minister Brian Lenihan openly talks of the need to “get our cost base down” in order to regain competitiveness. A policy of aiming to balance the budget and drive down wage costs is a throwback to the so-called Treasury View of the 1930s, a policy rejected then by progressives and rightly rejected now. The final irony is that, despite all of this needless suffering, the Irish Government will still be running a budget deficit of 12% of GDP this year while the ratings agencies have already cut Ireland’s sovereign bonds from AAA to AA.