Fiscal consolidation

 

ANALYSIS BY a Central Bank economist of Ireland’s protracted efforts to lower the budget deficit and to contain the national debt makes for sober reading. Laura Weymes* in her brief paper “Fiscal Consolidation: Does It Deliver?” compares Ireland’s performance against that of the four other countries in European Union and International Monetary Fund (EU-IMF) bailout programmes. By 2014, Ireland’s budget adjustment will – after Greece - be the second largest of those to receive international financial support.

Ireland’s austerity drive, which began in early 2008 will – when measured in spending cuts and tax rises – have reached an estimated 21 per cent of gross domestic product (GDP) by 2015.

But unlike the fiscal consolidation measures taken in the 1980s – where the emphasis was mainly on tax increases – a better economic balance has now been struck: two-thirds of the adjustment will come through lower spending, and one-third from higher taxes. Spending cuts are a more effective means of lowering the deficit, and less damaging to economic growth. Undoubtedly, the current budgetary adjustment has been a more intense and painful experience than that of the 1980s. However, the challenge this time is much greater. At stake is the country’s economic solvency.

Tough austerity measures are a necessary part of the price paid to secure funding support from an EU-IMF programme. And, as the author points out, without that financial lifeline the alternative would have been far worse. The need to close the deficit immediately would have meant far larger spending cuts and much steeper tax rises, with devastating consequences for jobs and living standards. But even with the tough measures already taken, and some more to come, Ireland will, up to 2015, continue to run the largest budget deficit of the five countries in bailout programmes.

Despite that, Ireland finds itself better placed for economic recovery than most of the other bailout countries. As Portugal struggles to meet its fiscal targets, it may yet require a second bailout programme. While reports from Greece suggest that its government may press for a two-year extension to its fiscal consolidation programme. By contrast, Ireland has seen its sovereign borrowing costs more than halved in the past year. And that positive trend, if maintained, could help Ireland regain access to financial markets for funding next year, and so avoid the need for a second bailout.

* This article was edited on Wednesday, August 22nd, 2012 to correct an error.

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