Irish politics and the great recession

Posted in: Economics, European politics, Political history, Political ideologies

Dr Ciarán Casey is an economic historian specialising in Irish economic policy. He is author of 'Policy Failures and the Irish Economic Crisis' (Palgrave MacMillan, 2018) and holds a DPhil from Oxford, where he was awarded a Clarendon Scholarship. In 2019 he was appointed Department of Finance Research Fellow at University College Dublin, and is working on a history of the Department, spanning the period 1959 to 1999.

A decade after the Irish economic crisis, it is clear that the key institutional weaknesses it exposed have remained unaddressed. Examining what observers of the economy said in the period before 2007 gives a good insight into where these lie. Nowhere are they more apparent than in the Dáil, where most TDs exhibited less interest or expertise in macroeconomic issues than almost any other commentators.

Regardless of the topic, many Deputies made clear that their intended audience was the electorate, continuously raising issues with which voters could readily identify. Favourite topics will be familiar to anyone who lived in Ireland at the time, including road safety; nursing homes; child care; the waste of taxpayers’ money; and above all, the shortcomings of the health service. Concerns with no natural constituency, like macroeconomic stability, attracted little interest and relevant debates were almost invariably interrupted.

Similarly, while Deputies did use publications by organisations like the Central Bank or the IMF (International Monetary Fund) to bolster their arguments, there was strikingly little engagement with the actual analysis. By contrast, programmes like Prime Time and Morning Ireland played a key role in setting the political agenda, with the former referenced in 285 debates and written answers between 2000-2006.

This apathy towards more formal sources of economic knowledge had profound implications. Senior Government Ministers argued throughout the period that cutting taxes was key to driving economic growth, and that this in turn enabled spending more on social services. While simultaneously cutting taxes and increasing spending was clearly politically popular, it was also critical in eroding the stability of the public finances.

Ministers may or may not have been aware that they were repeating a theory expounded in 1974 by the US academic Arthur Laffer to two senior members of the Ford administration - Dick Cheney and Donald Rumsfeld. The idea is relatively simple: if tax rates are zero then Government revenue will also be zero. However, if tax rates are 100% then revenue will still be zero, because there will be no incentive for enterprise or work. The relationship between tax rates and tax revenue is therefore not an upward straight line, but rather a curve that hits zero at each end.

Laffer’s point was that cutting very high tax rates could actually generate more revenue. Irish Ministers were quick to seize on this idea a quarter of a century later. The problem was that the incentive effects get smaller when tax rates are already low, and the Laffer Curve certainly does not suggest that cutting taxes will generate higher revenue under all conditions. Ministers were keen to argue that cutting tax rates had generated growth in Ireland’s recent past, when in fact the growth had come before the cuts. Furthermore, those cuts meant that it was less likely that further reductions in tax rates would generate more income.

The populist sensibilities of success governments had a dramatic effect on state spending. When Fianna Fáil was elected in 1997, newly-appointed Minister for Finance Charlie McCreevy committed to limiting current expenditure growth to 4%. One does not have to be familiar with the figures to realise that this did not happen. Remarkably, had the 4% target been adhered to, current expenditure would have been €19.4bn lower by 2006. Opposition deputies did make some attempt to question the inflationary effects of this spending, but like almost all commentators had no understanding of how precarious the situation was.

McCreevy also rightly pointed to a marked reluctance on the part of Deputies to identify the areas which he should cut. Indeed, the political pressure to increase the pace of tax cuts and spending creases in tandem was relentless. Both Fine Gael and Labour met each Budget with complaints that Ministers had not gone far enough, stopping at ‘the bare minimum that could have been done’. Tax cuts of €1,000 per worker were derided for being too conservative.

The political environment thus clearly incentivised the Ahern Governments to cut taxes and to increase spending as quickly as possible. There was plenty of concern in the House about the need to reduce waste and to cut inequitable benefits to the wealthy, but this was accompanied by markedly little concrete discussion or analysis of how such problems could be tackled on a scale that would offset the increasing reliance on revenue from construction and property.

By contrast, there was no appetite to propose more meaningful measures that could prove politically damaging. After six years in Government the Taoiseach could point on consecutive days to having achieved both the lowest level of personal tax in Europe for someone on the average wage, and having increased health spending from €4bn to almost €11bn between 1997 and 2004. The priorities of Deputies ensured that there was no political pressure to reverse or even to reduce the pace of either of these trends.

All articles posted on this blog give the views of the author(s), and not the position of the IPR, nor of the University of Bath. 

Posted in: Economics, European politics, Political history, Political ideologies


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