Fiscal Policy in Ireland

 Leddin and Walsh

Macroeconomy of the Eurozone, 2003

Economic Planning: National

Plans To Date

• First Programme (1958) • Second Programme (1964) • Third Programme (1969) • National Development (1977-80) • The Way Forward (1982) • Building on Reality (1984) • National Development (1994-99) • National Development (2000-2006)  Leddin and Walsh

Macroeconomy of the Eurozone, 2003

Objectives and Outcome

• These were medium-term plans to achieve specific targets for growth, employment, etc.

• Compare growth objective with the

actual

outcome. (See diagram.).

• These plans were generally unsuccessful due to: 1.Failure to implement measures.

2.Failure to forecast events.

3.Unrealistic assumptions.

 Leddin and Walsh

Macroeconomy of the Eurozone, 2003

12 10 1. First programme (1958) 2. Second programme (1964) 3. Third programme (1969) 4. National Development (1977-80) 5. The Way Forward (1982) 6. Building on Reality (1984) 7. National Development (1994-99) 8. National Development Plan 2000-2006) 8 6 Economic planning: Targets and outcomes 4 6 8 5 2 3 7 4 2 1 0 -2 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002  Leddin and Walsh

Macroeconomy of the Eurozone, 2003

Fiscal Policy and the Budget: Pre Celtic Target

• • No Keynesian type fiscal policy until 1972.

1972-77

expansionary policy in ’75. Timing of the fiscal policy was correct.

: Oil crisis, recession. Government reacts with • As economy improved in 1976, cut-backs were introduced to deal with the deficit. • 1976: Wealth tax, an upper income tax rate of 80%, VAT on wine, spirits and petrol.

• Finance minister Richie Ryan dubbed “Red Richie”,and the “Minister for Hardship”.

• The General Election of 1977 put an end to this progress.

• Examine charts for deficit, debt and borrowing.

 Leddin and Walsh

Macroeconomy of the Eurozone, 2003

•

1978

: Boom period. Yet the new government introduced an expansionary policy. Timing was wrong. • George Colley. Increased income tax allowances, public sector pay, rates and wealth tax abolished.

• Rationale: economy.

self-financing fiscal boost

. • Did not happen. Budget deficit increased. Public finances now vulnerable to a downturn in the •

1979:

another oil crisis as prices rise from $12 to $32 a barrel. • This was the end of Keynesian type fiscal policy in Ireland.  Leddin and Walsh

Macroeconomy of the Eurozone, 2003

Fiscal Rectitude

•

1982

: New government. Economy in recession and budget deficit at an all-time high.

• Introduction of a

deflationary

fiscal policy. • The policy instrument had taken over from the policy objective.

• • The finance minister John Bruton promised to phase out the deficit over 4 years, proposing 18% VAT on children’s clothing and footwear. Excise duties, income tax, postal and phone charges were all to be reduced. Bruton’s budget was defeated by 82 votes to 81.

1982-86

:

Laffer curve

type effects. Recession and doubling of national debt.

 Leddin and Walsh

Macroeconomy of the Eurozone, 2003

The Celtic Tiger

•

1987:

The formation of a minority Fianna Fáil government led to greater economic uncertainty.

• Another deflationary fiscal policy.

• The finance minister Ray MacSharry reduced current expenditure, freezing public sector pay, placing an embargo on recruitment, and raising the tax burden by 9.5%.

• Paradoxically, there is an increase in economic growth. • The explanation for this is know as

Expansionary fiscal contraction

.

 Leddin and Walsh

Macroeconomy of the Eurozone, 2003

•

1991 - 1997

: Two main strands to fiscal policy: 1. Attempt to meet

Maastricht criteria

. • Criteria: < 2.7% inflation rate, debt/GNP ratio (60%) and GGD (3%).

• No active stabilisation policy since 1991. • Main concern was to qualify for EMU.

2.

National Wage Agreements

(NWA’s) between government, employers and trade unions.

• In return for low wage increases, the government promised to cut taxes at budget time. • Essentially a supply-side policy.

• Contributed to an increase in competitiveness and the high growth rates of the 1990s.

 Leddin and Walsh

Macroeconomy of the Eurozone, 2003

1997-2002

• Charlie McCreevy introduced what may be described as a “

supply-side enhancing fiscal policy

”.

• As the economy boomed, the Budget moved into surplus.

• The Minister gradually reduced income and corporation tax, increased spending on social welfare, education, health and infrastructure.

• All five budgets from 1979 – 2001 were highly expansionary at a time the economy was booming.

• Brought forth a reprimand from the European Commission.

• They argued that fiscal policy is essentially a demand-side phenomenon. McCreevy’s budgets were

pro-cyclical

and tened to exasperate the over-heating problem.

2002-2010 • Will look at this in detail later • Govt Surplus continued

– Celtic Tiger Growth 4%-6% – Housing market

• Policy almost as expansionary as before • Rapid deterioration in the budget during 2007-9

– Automatic stabiliser: housing market – Discretionary: full employment budget – National Debt

Current budget deficit 1972 - 2002 8 6 4 2 0 -2 -4 -6 -8 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002  Leddin and Walsh

Macroeconomy of the Eurozone, 2003

Exchequer borrowing requirement 1972 - 2002 16 14 12 10 8 6 4 2 0 -2 -4 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002  Leddin and Walsh

Macroeconomy of the Eurozone, 2003

CBD/GNP & EBR/GNP 1996-2010

20 15 10 5 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -5 CBD EBR -10

National debt 1972 - 2000 140 120 100 P N G f o % 80 60 40 20 0 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999  Leddin and Walsh

Macroeconomy of the Eurozone, 2003

Debt/GDP (1996-2010)

80 70 60 50 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010