Is Ireland the Role Model for Austerity?

IS IRELAND REALLY THE ROLE MODEL FOR AUSTERITY? Stephen Kinsella University of Limerick

“GREECE HAS AROLE MODEL. AND THAT ROLE MODEL IS IRELAND.”

3 IDEAS.1. What happened? 2. What are we going to do about it? 3. Is austerity the right way to go?

ROMANTIC IRELAND’S DEAD AND GONE

Year/%Chg 2006 2007 2008 2009 2010 2011f 2012f Personal 6.8 6.5 -1.1 -6.9 -0.8 -2.4 -0.4 Consumption Government 4.9 6.6 0.5 -4.5 -3.8 -3.6 -1.9 Consumption Investment 4.5 2.3 -10.2 -28.7 -24.9 -10.7 -1.3 Exports 5.0 8.4 -1.1 -4.2 6.3 6.0 5.2 Imports 6.9 7.9 -3.0 -9.3 2.7 3.0 4.0 GDP 5.3 5.2 -3.0 -7.0 -0.4 1.1 2.8 GNP 6.3 3.9 -2.8 -9.8 0.3 0.8 0.9Source: Irish Department of Finance and IMF Country Report for Ireland No. 11/276 and IMF FiscalMonitor September 2011

16"14"12"10" 8" 6" 4" 2" 0" 2006" 2007" 2008" 2009" 2010" 2011" UNEMPLOYMENT ~ 14.4%

0.00% 2.00% 4.00% 6.00% !6.00% !4.00% !2.00% 1971!04!01% 1972!05!01% 1973!06!01% 1974!07!01% 1975!08!01% 1976!09!01% 1977!10!01% 1978!11!01% 1979!12!01% 1981!01!01% 1982!02!01% 1983!03!01% 1984!04!01% 1985!05!01% 1986!06!01% 1987!07!01% 1988!08!01% 1989!09!01% 1990!10!01% 1991!11!01% 1992!12!01% 1994!01!01% 1995!02!01% 1996!03!01% 1997!04!01% 1998!05!01% 1999!06!01%Benchmarked%Unit%Labor%Costs%!%Total%for%Ireland% 2000!07!01% %"Changes"in"Wages"and"Prices,"197142011" 2001!08!01% 2002!09!01% 2003!10!01% 2004!11!01% Consumer%Price%Index:%All%Items%for%Ireland,%Index%2005=100.% 2005!12!01% 2007!01!01% 2008!02!01% 2009!03!01% 2010!04!01%

CAUSED BY:An old-fashioned credit boom.

Year on year percentage change in the numbers of customer loansof Anglo Irish Bank, Bank of Ireland, and Allied Irish Bank (AIB).Source: Central Bank of Ireland.

Growth rate in total household lending and total household deposits. Source: Central Bank ofIreland, Table A.18 Money and Banking Statistics.

RESULT: BALANCE SHEET RECESSION.

! Assets% €bn% Liabilities% €bn% A.!Cash! 16.2! E.!Government! 116.5! securities/borrowings! B.!Non>bank!NPRF! 15! F.!Provisory!notes! 30.9! C.!Non>bank!fin.!Assets! 31.2! !!!!!!!!!Anglo!Irish!bank! 25.3! D.!NPRF!investment!in!banks! 9.4! !!!!!!!!!Irish!Nationwide! 5.3! Total!financial!assets!(C+D)! 9.4! !!!!!!!!!EBS! 0.3! ! ! G.!Special!investment!shares! 0.7! EBS/INBS! ! ! GGD!(E+F+G)! 148.1! ! ! Net!government!debt!(GGD)>non.! 116.9! Financial!assets,!(C).! Loan!assets!of!NAMA! 30.7! Bonds!issued!by!NAMA! 30.7!Irelands Assets and Liabilities at the end of 2010.Source: NTMA.

Composition of Loans in EU/IMF Bailout Package. Source:Department of Finance.

Cure: Austerity?

€Bn 2011 2012 2013 2014 2015 Total 6.0 3.6 3.1 3.1 2.0consolidation Expenditure 3.9 2.1 2.0 2.0 Current 2.1 1.7 1.6 1.6 Capital 1.8 0.4 0.4 0.4 Taxation 1.4 1.5 1.1 1.1 Other 0.7Indicative consolidation measures. Source, Irish Fiscal AdvisoryCouncil, Fiscal assessment report October 2011

1. Fiscal consolidation. d.Burden sharing by holders of subordinated (not senior) bond debt.a. Taxes are to be raised. Carbon, property,and water taxes are to be introduced, a 3. Structural reforms to thelowering of personal income tax bands and labour marketcredits is to be pursued. a. The IMF proposed a reduction of theb. Government expenditure, including social minimum wage. Government scrapped this.protection expenditure and numbers ofpublic sector workers is to be reduced. b. Increase workplace training and internship positions.2. Financial Sector Reforms c. Government will introduce legislativea. A further deleveraging of Irish banks by changes to remove restrictions to trade and€72 billion over 3 years. competition in sheltered sectors including the legal and medical professions.b.There will be a reorganisation of thebanking sector. Smaller banks are beingmerged with larger ‘pillar’ banks.c. Increases in Tier 1 capital ratios of ‘pillar’banks.

SIMPLE MODEL ! = !! + !"! ! = !! − !";! ∗ 1 ! = (!! + !!! ) ! 1 + !" 1 !∗ = (−!!! + !! ) ! 1 + !" !" 1 = ≥ 0! !!! 1 + !" !∗ !! − !!! ∗ = (! + !! )! ≥ 0! ! ! ! !∗! !∗ 1 + !" !! !−! = ≥ 0! x. y > !!!! (!! + !!! ) ! !−!+!

Fiscal Surplus DPS - DPS + CA Deficit CA Surplus Ireland 2007 DPS - DPS + DPS =0 Fiscal DeficitDomestic private sector fin. Bal. = current account bal. - fiscal bal.

Fiscal Surplus DPS - DPS + CA Deficit CA Surplus DPS - Ireland 201X DPS + DPS =0 Fiscal DeficitDomestic private sector fin. Bal. = current account bal. - fiscal bal.

CurrentAccount 2000% 0% 1998%1999%2000%2001%2002%2003%2004%2005%2006%2007%2008%2009%2010% !2000% !4000% !6000% !8000%!10000%!12000%Ireland’s current account. Source: CSO

IRELAND IN 1980. FISCAL FAIRIES?Exchequer borrowing as a percentage of gross national product,1980-1990. Source: Department of Finance,

IRELAND IS NOT THE ROLE MODEL FOR AUSTERITY• Historical experience argues against it.• Small open economy considerations matter.• The experience of the 1980s in Ireland shows that it is possible to reduce ﬁscal expenditure in a small open economy openly courting foreign direct investment with friendly taxation rates when the rest of the world is growing and one is receiving transfers from other states whilst reducing costly unemployment through emigration.

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Is Ireland the Role Model for Austerity?

by Stephen Kinsella

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