Ireland’s public finances: it’s ‘Croke Park’ or face the worry of default
Brian Cowen faces a choice between three constituencies – Irish Government bondholders, the public sector trade unions, or Irish citizens. By choosing to ‘default’ on the 'Croke Park deal', (a secret (and arguably unconstitutional) agreement signed in April 2010 with Ireland's public sector trade unions) rather than bondholders in 2011, he chooses the nation. The fiscal situation and conditions of today are similar to 1987, as the Government drafts its four year Economic Plan for the EU. In some respects the task of restoring order to the economy is easier (interest rates are lower than they were then and the debt-GDP ratio is still lower than it was then). In other respects, the task is more challenging (the relative competitiveness of the Irish economy today is inferior to what it was then, and this is mainly due by the entrenched ‘social partnership’ system that, through the ‘Croke Park Agreement’, has tied the hands of the Government on its Budgetary options). Nevertheless, there is a possibility, if the Government could free itself of ‘Croke Park’, that Ireland could be spared a lost decade, or even two. It would have to follow a strategy of bigger spending cuts than so far mooted, for example by Brian Cowen, as it has been urged to do by politicians on different sides of the Dail divide, such as Ray MacSharry and Peter Sutherland, and, it would best do so without resorting to tax increases. It could also be helped to get out of the Croke Park straitjacket if it could blame the EU. We give the reasons why in the below six Questions & Answers.
1. Calls are now being made for big spending cuts of € 6 billion in the coming Budget. What are the issues? Don’t people fear the consequences of big cuts?

The more spending cuts there are the better, and the bigger the better.

If cuts are exclusively focussed on eliminating waste, then the more the better. There should be no waste at all in the public spending system, irrespective of where the economy is at in the cycle.
DECLARATION OF INDEPENDENCE: The first Prospectus for the first bond issued by Ireland in 1920. Signed by Michael Collins as Minister for Finance, it successfully raised £250,000. It derived its authority from the Dail, 'elected by you at the polls in December last to claim and assert the independence of our country'. Since that time, no Irish Government has defaulted on its bonds.
DECLARATION OF INDEPENDENCE: The first Prospectus for the first bond issued by Ireland in 1920. Signed by Michael Collins as Minister for Finance, it successfully raised £250,000. It derived its authority from the Dail, 'elected by you at the polls in December last to claim and assert the independence of our country'. Since that time, no Irish Government has defaulted on its bonds. (click to enlarge)


There is, therefore, no economic case at all for continuing with waste spending. Waste is not good for any economy, at any time in the cycle. A downturn indeed offers an opportunity to cut waste from the system. The economy will immediately benefit from it, and long term accruing benefits will come from its absence in the long term.

2. Is there €6 billion in waste spending in the system?

Yes, Colm McCarthy’s An Bord Snip Nua, identified €3.5 billion worth in its first report. It said that further economies could be identified. Total expenditure exceeds €50 billion. It needs to be reduced by about €6 billion in 2011. That would be by about 12 per cent (or the amount of shrinkage Ireland’s accountancy firms had to manage in the past year - see our cover story this month). Such savings were achieved in 1987, when the original An Bord Snip told all Government Departments to cut their budgets by a given percentage amount across the board, with no excuses, and a Zero Tolerance policy for failures by any Department.

3. Some economists, such as those employed by public sector trade unions (without exception to date), and, many of those employed by the Irish banks and stockbroking firms as well as Keynesian economists such as Paul Krugman, believe that ‘stimulus’ through public spending is needed, and that cutting Government spending runs the risk of accentuating the downturn.

This view is not based on an understanding of the real dynamics of the Irish economy, but rather an outmoded academic ‘multiplier’ model of the Irish economy. (Most famously set out in a pamphlet called ‘How to Pay for the War’ written by Keynes in 1940). The British economy, to which the ‘multiplier’ model applied, was a large closed economy, with a much lower propensity to import, which was the case during the Second World War). Furthermore, public works-type expenditure by Government in the 1930s was very labour intensive and aimed at employing the masses of unskilled labourers who were out of work in the 1930s. (Keynes’ public works ideas of the 1930s followed the example of the workhouse relief-type expenditures in Ireland during the Famine).

We live in a very different world today, in two key respects: 1) Infrastructure projects are now very high tech, and consequently are notoriously bad at creating employment. Instead they result in imports of high tech engineering work and skills from abroad. Recent examples of such ‘stimulus’, paid for by Irish taxpayers, and largely lost to the Irish economy, are the €100 million earmarked in August 2010 for two new naval vessels (employment content, virtually zero), and the €300 million for completing a ‘Luas to nowhere’ (Carrickmines, in Co Dublin).

2) The modern labour force is multi skilled, multi sectoral, and multi professional, and much more heterogeneous skill-wise than it was in the 1840s and 1930s. You are not going to put out-of-work teachers, health workers, auctioneers, retail and catering workers, and bankers to work on building roads, or building stone walls up and down the mountains of the west of Ireland. The most effective form of ‘stimulus’ by far comes from tax cuts, or at least a promise of no more tax increases, allied with a promise to cut the waste, and the confidence that resolute effort from the Government would immediately engender.

Many years after Keynes set out the multiplier model, (which still holds sway over a whole generation of Irish economic graduates), it was discovered by a school of economists (known as the Doheny & Nesbitt school) that the Irish economy conformed to an ‘SOE’ model, (‘Small Open Economy’) and, with much higher import propensities, would not benefit from ‘stimulus’ to anything like the degree that the wartime British economy would.

Ireland’s high budget deficit spending sucks in imports (seen for example in the shopping exoduses over the border, as were witnessed spectacularly in December of last year). Public spending may be a form of ‘stimulus’, but it stimulates jobs in other countries, especially, if, as is the case, Irish costs are uncompetitive because of tax impositions to ‘bridge the gap’.

Madcap Keynesianism, Irish and International


There are unfortunately too many examples of the spell cast by the crude Keynesian multiplier model on the beliefs of both international and Irish economic commentators. An example of this thinking in an Irish context is contained in the following article by David McWilliams : (the conclusions of which might be laughable, were the subject matter less serious).

International examples include Paul Krugman whose views on Irish and, lately, UK economic policy promise to become as contradictory as those he has uttered about the US economy. Notable among these are the series of columns he wrote in 2001 and 2002 about the need for Greenspan to cut interest rates to fight the recession that had followed the bursting of the tech bubble, and his now-infamous 2002 column in which he declared "Alan Greenspan needs to create a housing bubble to replace the NASDAQ bubble". He continued to cheer-lead Greenspan's cuts, in fact complaining that they were not fast enough, and then, when rates reached rock bottom in May 2003, called for the Fed to declare an inflation target. Fast forward to 2006, a short, in economic policy terms, two and a half years later, and we find Krugman saying: "If anyone is to blame for the current situation, it's Mr Greenspan, who pooh-poohed warnings about an emerging bubble and did nothing to crack down on irresponsible lending".

4. Stimulus is needed to ‘kick start’ a stalled economy, and to get consumers spending again, and businesses investing.

Both consumers (otherwise described as ‘workers’, ‘individuals’, or ‘families’ (depending on your political ideology) and businesses are actually ‘entrepreneurial’ in their economic behaviour. They are also always rational. Another way of saying this is that in the long run they are not financial fools. They know exactly what taxpayer-financed-stimulus is – a robbing of Paul to pay Peter (just a shift of money from one group in society (taxpayers) to another (non taxpayers), with no ultimate gain – except a loss of efficiency, because one of these groups is (by definition) more efficient, and productive than the other).

Therefore, the more efficient group are not encouraged by such Government intervention. On the contrary they are discouraged, because they know it won’t work. At worst, in Ireland’s case they will see it for what they know it really is - a political push by a class of elite controllers of Irish society (notably the public sector trade unions) to continue to push the Irish economy towards collapse. Rather than stimulating spending, such policy does the opposite. The result will be a tax strike (such as already is being shown in the monthly Exchequer returns), or at worst, emigration by those with both skills and capital.

5. Why No Tax Increases?
If there is €6 billion in waste then any ‘contribution’ from taxpayers (the more efficient sector of society who earn their incomes in the labour market – and this includes public sector employees) means that for every euro raised in tax, there is a euro more in waste. This situation is bad for morale, at a time of financial crisis, and has a double negative effect in that it adds to the depressing impact of taking money out of the economy.

Taxes depress demand of the most productive kind – because the money is spent by expert job creators (business owners), and expert spenders (private families, who know at a micro level how best to spend their scarce money). Instead the money is funnelled into the hands of Government bureaucrats, and are therefore clueless as to how to really stimulate the economy, and who then are incentivised to just go ahead and waste it. The Government furthermore has already hiked taxes to levels that would capture the revenue required to breach the gap in the past few Budgets, if there were an autonomous revival of spending and investment by Irish taxpayers. By promising no more income taxes then, the Government implicitly recognised this. But now, it is being seen as a political pay-off to the power of the public sector trade unions, and that is very bad for the economic confidence of the nation, who see the country as sliding into a Greek-style morass, under a weak Government in thrall to these unions.

6. The only possible source of internal stimulus: an autonomous revival of spending and investment by Irish taxpayers.

The answer lies in an autonomous revival of spending and investment by Irish taxpayers and this will only come from confidence in the recovery and indeed survival of the Irish economy. Everybody knows now that depends on one thing only: the Government and its finances.

There is a very rare but important lesson on this from Irish economic history. It was proven by a former Minister for Finance - Ray Mac Sharry, in 1987. Prior to a decision to apply radical spending cuts of a dramatic and exclusive nature in the 1987 Budget there was a debate on the issue. It was reported by the present writer (then Economics Correspondent of the Irish Times) that there has been a debate between two schools of thought on the issue – one (what might today be described as the ‘Keynesian’ view – put forward by Dr T.K. Whitaker, and the other (which might be called the ‘Doheny & Nesbitt’ view) articulated by Brendan Dowling, then an economic analyst with Davy Stockbrokers, which was that cuts would produce their own stimulus, through a revival of entrepreneurial spirits.

What shocked, (and pleasantly surprised) the economics community at the time was the sheer speed of recovery and response by the private sector to the resolute action of the then Government through the implementation of the ‘Dowling view’, which launched the beginning of the ‘True Celtic Tiger Period’ for the Irish economy (1987 to 2000).

The conditions of today are virtually identical to 1987 in this respect. In some respects the task is easier (interest rates are lower than then (thanks to J.C. Trichet who remains horrified by what the euro unleashed), and the debt-GDP ratio is still lower than it was then). In other respects, the task is more challenging (the competitiveness of the Irish economy today is worse than it was then).

All in all, though, the situation is essentially similar, and the economy has not changed – indeed it has become even more open than it was in 1987. The ‘Small Open Economy Doheny & Nesbitt’ model of the Irish economy is even more valid today.
Thus, a strategy of deep spending cuts, accompanied by tax cuts (or at worst no tax increases), would, without any shadow of doubt work.

There is possibly just one last chance now for the Government to save the economy, and Irish political and its economic sovereignty. It truly is the eleventh hour. Tax increases of any kind, combined with a further message of acquiescence to the public sector trade unions would lead to an implosion of confidence by the rational citizenry.

In practical terms, a cut of €6 billion would get the inevitable over fast. Everyone knows that cuts have to be made. Is it not better to take the medicine, get it over quick, rather than prolong the agony through a long slow process of decline?

This article appeared in the October 2010 edition.