Irish Public Finances through the Financial Crisis

Abstract

Ireland was one of the countries most negatively affected by the Great Recession. GDP fell by 13 per cent and unemployment rates increased sharply. The recession uncovered fundamental flaws in the Irish economy such as an over-reliance on the construction sector for employment and taxes and a move away from income-based taxes. A collapse in house prices and a sharp reduction in construction activity led to job losses and falls in the tax take. Irish banks had become over-reliant on foreign funds to finance lending and regulation was lax. The bursting of the construction bubble was therefore coupled with a financial crisis resulting in a 'bailout' of Irish banks by the government. As the gap between revenue and expenditure grew and borrowing increased, a government-backed guarantee of Irish bank deposits eventually led to worries about the solvency of the Irish government and the inability to borrow in international bond markets. This resulted in Ireland entering into a financial assistance programme with the International Monetary Fund (IMF), the European Union (EU) and the European Central Bank (ECB). The government embarked on a series of austerity measures amounting to one-fifth of GDP between 2008 and 2015, with roughly one-third of the response being increased taxes and two-thirds expenditure reductions. Taxes have increased, a residential property tax was introduced and social welfare rates have been reduced for those of working age. The redistributive effects of these changes cannot be viewed as either regressive or progressive, with the top decile experiencing the sharpest cut to disposable income, followed by the bottom decile. Recovery has been strong in recent years, however, with GDP forecast to return to its 2007 peak level in 2015. The unemployment rate has fallen to just under 10 per cent from its 2011 peak of 15 per cent but still remains well above its pre-crisis level of 4 per cent.