The Political Economy of Fiscal Consolidation in Two Recessions in Ireland
43 Pages Posted: 25 Oct 2013
Date Written: 2013 21, June
Abstract
Ireland has been seen as an exemplary case of successful growth-promoting fiscal retrenchment, not once but twice – first, in the fiscal consolidation undertaken in the late 1980s, which was taken as one of the classic original instances of ‘expansionary fiscal contraction’, and again now, in the context of meeting the fiscal deficit targets set by the current EC-ECB-IMF loan conditions. This paper argues that many of the apparent lessons drawn from Ireland’s experience turn out to be more complex and even misplaced upon closer inspection. Ireland was never an instance of ‘expansionary fiscal contraction’ in the sense in which it now understood.
Firstly, the paper shows that standard methodologies for identifying the object of interest in fiscal consolidation misses out on what is really central, which is the ongoing politics of ‘fiscal effort’. Secondly, this approach challenges conventional ideas about the primacy of spending cuts over tax increases. Thirdly, Ireland’s fiscal stabilization in the earlier period depended on devaluation, international growth, and strong social pacts. Whatever arguments may be offered for fiscal retrenchment now, expansionary fiscal contraction is not a plausible one. These are not palatable lessons for today’s austerity advocates.
Keywords: austerity, fiscal policy, Ireland, EMU, fiscal crisis
JEL Classification: E62, E64, E65
Suggested Citation: Suggested Citation