Saturday, December 31, 2011

Irish Fiscal Policy in 2009

The usual suspects have questioned whether Ireland really pursued austerity. Others seized on the fact that the Irish government increased government spending in 2009: wasn’t this a stimulus?

The answer is: not likely. First, a government deficit per se does not tell you whether fiscal policy is expansionary. Nor does simply looking at total government spending by itself. There are other factors to be considered:
(1) what was the effect of local and (if relevant) state government budgets?

(2) were taxes raised? If so, by how much?
Here are the figures for Ireland’s annual government spending (the Irish fiscal year is the calendar year):
Irish Government Spending
Year | Budget*

2007 | €50.9
2008 | €55.7
2009 | €60.0
2010 | €55.0
2011 | €51.9
* Billions of euros
Now it is unclear to me whether this is total government spending at all levels (e.g., thirty-four local governments exist in Ireland called county or city councils, as well as regional authorities, although I don’t think the latter have much fiscal effect).

What is clear from the data is that, from 2009 to 2011, there was been a 13.5% cut to total national government spending. That is very sharp fiscal contraction, with the tax increases that Ireland has imposed.

What of 2009? The answer follows:
(1) There was a €4.3 billion increase in spending in 2009, over 2008.

(2) Taxes were raised in 2009. This will have offset the €4.3 billion increase in spending. Ireland passed a supplementary budget in April 2009 (the first was announced in late 2008), which involved expenditure cuts of €1.5 billion and a rise in taxes of €1.8 billion. The total fiscal corrective measures in 2009 were €8 billion (see here). Although I have not found the exact figures for tax increases in this €8 billion sum (can anyone find it?), apparently the tax increases were designed to increase the government’s tax revenue by €6 billion in one year (see “Fine Gael’s Budget for Jobs: Explanatory Memo,” p. 1), with income tax, social security and consumption tax increases. It is obvious that the tax increases alone must have wiped out all or most of any expansionary effect from the €4.3 billion increase in spending in 2009, and it is likely that these tax hikes by themselves caused a contractionary fiscal effect.

(3) I have yet to find accurate figures, but if we have to factor in local government cuts, we probably have a highly contractionary budget even in 2009.

(4) I doubt whether the net effect of fiscal policy in 2009 was stimulative, but even if the net effect was mildly stimulative (like some of Hoover’s deficits), this would have been far too small to do anything about the €13.7 billion dollar collapse of GDP in 2009, as Ireland was hit hard by the worst effects of the global recession in that year.

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