Darling’s lessons from Irish budget
The latest budget from Europe’s only other English-speaking country should be studied by Alistair Darling before he delivers his own April statement. The Irish economic measures are the opposite of what the UK chancellor is planning.
Ireland is cutting public spending – both current expenditure on pay and capital spending on infrastructure – reducing benefits for children and job-seekers and raising taxes. There will be an extra 4 per cent tax on incomes above 75,000 euros and 6 per cent above 175,000 euros, plus a 1 per cent pension levy.
Even the “bad bank” for Ireland’s lenders’ toxic debts has been shunned by Darling and other European leaders.
The solution in the rest of the EU – and the US - is short-term benefit increases, massive public-spending rises and tax cuts. The aim there is to get people to spend their way out of recession while Eire’s budget will leave people with much less to spend and the state not compensating for the fall.
However painful the solution being employed outside Ireland, the return to Keynesiansm is the better of the evils. The Irish feel they have little choice however: their economic boom was an exaggerated version of the UK’s, built on property and financial services and fueled by debt (and EU subsidies).
Ireland has the disadvantage of its economy still being coupled to its nearest neighbour, Britain, but has lost the advantage of being able to devalue its currency, slash interest rates to negligible levels or print money.
The Dublin budget forecasts the economy contracting at 7.7 per cent this year and 2.9 per cent in 2010. The budget deficit exceeds 10 per cent. So will unemployment. Deflation of 4 per cent is so severe it is dangerous. Credit rating agencies have downgraded Eire’s debt.
By comparison, Darling’s gloomy UK budget will look like a boom. But Ireland has taken the pain now that Britain will have to spread over several years.
Ireland entered the downturn in a far worse state than Britain and went into recession first. It is questionable which country emerges first but it is quite feasible Eire will have the fastest subsequent growth because Britain will still be paying the cost of its bank rescue and other measures well into the next decade and possibly beyond. Think tortoises and hares.
April 14th, 2009 at 2:20 pm
While Ireland opts for short-term pain, it remains unclear just how long it will take for Darling’s strategy to really take effect. Small businesses in particular have yet to gain any real benefit from the VAT reduction and the additional tax relief to businesses making losses, both announced in the Pre-Budget Report. However, a recent survey of small businesses does indicate that tax cuts could provide benefits over the longer term.
Reduction of employers’ National Insurance contribution rate and an extension of VAT reduction to 15 per cent for a further 12 months both featured in their top five wishes for Darling’s forthcoming Budget. Whether they will get their wish is up for question, as is how long it will take for the Tortoise to cross the finishing line.