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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
Fiscal Policy and the Budget: Pre Celtic Target • No Keynesian type fiscal policy until 1972. • 1972-77: Oil crisis, recession. Government reacts with expansionary policy in ’75. Timing of the fiscal policy was correct. • 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: self-financing fiscal boost. • Did not happen. Budget deficit increased. Public finances now vulnerable to a downturn in the economy. • 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 CelticTiger • 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 asExpansionary 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