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Ireland’s Second Fiscal Consolidation – Lessons from the Last Time

  • Colm McCarthy

    (University College Dublin)

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    For the second time in a generation, Ireland is in a deep fiscal crisis, with double-digit borrowing, escalating debt and concerns about the country’s solvency in international debt markets, reflected in the largest adverse bond spreads of any Eurozone member. What’s different this time is that the fiscal system’s second crisis since the foundation of the state has coincided with the banking system’s first. The banks have lost a large portion (on worst estimates, all) of their capital and survive on liquidity furnished, on a prodigious scale, by the European Central Bank. Parallels with the first Irish fiscal crisis in the 1980s are of limited value given the quite different circumstances. The next section argues that fiscal consolidation post-1987 was less daunting than is likely to be the case over the next few years, and that the role of expenditure cuts under the first Bord Snip has been exaggerated in journalistic renderings of the history of the period. The deterioration in the public finances has been extraordinarily rapid – even with substantial tax rate increases, revenue has fallen far more rapidly than the tax base, while spending has continued to advance, despite the widespread perception of cutbacks. The conduct of fiscal policy since 2000 is reviewed in section three, and the prospects for a medium-term fiscal consolidation in section four. The paper concludes with some lessons from Irish experience for politicians - and for economists.

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    Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200917.

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    Length: 19 pages
    Date of creation: 01 Oct 2009
    Date of revision:
    Handle: RePEc:ucn:wpaper:200917
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    1. Patrick Honohan & Brendan Walsh, 2002. "Catching Up with the Leaders: The Irish Hare," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 1-78.
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