Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

The Recovery in the Public Finances in Ireland Following the Financial Crisis

Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

The Recovery in the Public Finances in Ireland Following the Financial Crisis

Article excerpt

1. INTRODUCTION

In 2015, the General Government deficit in Ireland improved to 1.9 per cent of GDP, with the debt ratio falling below 80 per cent of GDP for the first time since 2009. This ensured a successful exit from the Stability and Growth Pact's Excessive Deficit Procedure (EDP) and marked a dramatic improvement relative to the situation that prevailed in 2010. In that year, Ireland with a rapidly rising debt ratio and the highest deficit in the Euro Area was effectively locked out of the bond markets and had to enter into an EU/IMF support programme.

There have been a number of articles and papers written on the fiscal crisis in Ireland, its origins and policy responses, including a multitude of EU/IMF related documents. The Irish Fiscal Advisory Council (IFAC), set up in response to the crisis (in 2011) has regularly reported on fiscal and economic developments through its bi-annual Fiscal Assessment Reports. Whelan (2013) documented the key factors that contributed

to the economic crisis in Ireland with particular attention paid to structural imbalances, the role of the banking system and policy responses (both domestic and international). Keane (2014) also reviewed the public finances in Ireland, specifically the causes of the crisis and discretionary policy responses.

Much of the improvement in the fiscal position reflects the hard choices made (beginning in 2008) to correct the public finances through a series of consolidation measures in successive budgets. The role played by interest costs are often overlooked as are a number of other well-timed (and perhaps fortuitous) factors that included statistical revisions and buoyancy in certain revenue categories. This paper reviews these factors through the adjustment period to highlight their role in both enabling Ireland to exit from the EDP while also facilitating higher levels of spending.

The paper is structured as follows. In Section 2, a broad overview of the public finances in Ireland through the crisis period is presented. Section 3 focuses on the evolution of the General Government Balance and the better than expected performance over the crisis period (specifically 2011 to 2015). In Section 4, the roles played by interest costs and data (GDP) revisions in driving much of the improvement is highlighted with some counterfactual scenarios modelled in Section 5. Section 6 concludes.

2. THE PUBLIC FINANCES IN IRELAND DURING THE CRISIS YEARS (2008-2015)

With the onset of the financial crisis from 2008, the fiscal position in Ireland rapidly unwound. The combination of a marked economic slowdown, a collapsing housing market and banking problems resulted in rapidly rising deficit and debt ratios (Figure 1). (2) Having been in a position of strong surplus from 2003 to 2007, the public finances deteriorated sharply with the underlying deficit peaking in 2009 at 11.6 per cent of GDP. (3) The marked rise in the deficit culminated in an EDP being launched in 2009 and entry into a formal EU/IMF assistance programme in late 2010.

In response to the deteriorating fiscal position, successive governments embarked on a prolonged period of fiscal consolidation from mid-2008 to 2014. In total, consolidation measures of close to [euro]30 billion or 17 per cent of GDP were introduced (Table 1). These adjustments were to a large extent set out in the National Recovery Plan (published in 2010) and were an integral part of the assistance programme agreed with the EU/IMF in December 2010 (herein known as the Programme). (4) This involved financial support of [euro]85 billion over a 3-year period with [euro]67.5 billion in external support. This included:

* [euro]22.5 billion from the IMF

* [euro]22.5 billion from the European Financial Stability Mechanism (EFSM)

* [euro]22.5 billion from the European Financial Stability Facility (EFSF)

* [euro]4.8 billion in bilateral loans from the UK, Sweden and Denmark. …

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