Download Fiscal Policy in Ireland

Fiscal Policy in Ireland
 Leddin and Walsh Macroeconomy of the Eurozone, 2003
Economic Planning:
National Plans To Date
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•
•
•
•
•
•
•
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
Economic planning:
Targets and outcomes
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
4
8
6
6
5
2
3
7
4
1
2
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: 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 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
% of GNP
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
% of GNP
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
-5
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
CBD
EBR
-10
2010
National debt
1972 - 2000
140
120
100
% of GNP
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