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Éirinn go Brách

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John Short:
The level of hype and at time hypocrisy from some UK politicians (usually Tory and anti-EC) on Ireland’s current situation is very interesting, particularly in terms of using it to attack EC membership and the euro in particular.  It is worth looking at the reason for the current state of affairs and it is certainly not to do with the EC nor euro but plain bad economic policy.  Ireland's tax base was (is) too narrow with developers getting huge tax breaks, among others   The banking system was allowed to respond by throwing money at property without any curbs whatsoever.  So there was a rational economic response to the “incentives” and everyone piled in until the bubble burst.  The Irish population had grown with immigration (the Diaspora and economic migrants), but nothing like the population before the famine, so there was a demand for housing which did not need an artificial stimulus.  Nothing much about the EC or the euro there!

But look at the Ireland now and compare it with the one that my father and mother (with myself and three siblings in tow) left Ireland as economic migrants in the 1950s?  Today the infrastructure is relatively good with motorways linking the North and midlands and further south and west to Dublin.  Tertiary education is unrecognisable. These all have benefited from EC membership and the resultant flow of funds that has allowed these investments.  Without EC funding these would not have materialised in the timescale they did – EC money was not wasted or so it would appear.  High-tech knowledge based industry now well outweighs agriculture which was the predominant generator of employment.  And yes, the low (relative to the rest of Europe, but not some other countries) corporation tax has helped, but is that significant?  The attractiveness of Ireland in this regard has to be the output of its education system rather than any backward linkages to resources and raw materials so there is no natural resource rent to be taxed.  The alternative is an uncompetitive higher tax rate where footloose investment goes elsewhere and the qualified Irish follow (sounds like a familiar historical theme).  Perhaps better to keep them at home with a logical tax rather than the illogical ones that caused the bubble in the first place. 

So here we are with the IMF and EC “faceless men” storming Dublin Castle, as we are led to believe.  Is there anything wrong with getting assistance from the International system designed to provide such help?  Many countries have used the IMF including the UK in the mid 1970s.  Ireland cannot devalue but it has introduced structural reforms that have the same impact by reducing wages relative to its competitors.  It is addressing its deficit and the banking crisis and the funding is to help with that.  Hopefully it will address the narrowness of the tax base and rid itself of distorting exemptions.

John Short:
Announced today
http://www.budget.gov.ie/RecoveryPlan.aspx
http://www.budget.gov.ie/Leaflet.pdf

John Short:
Very interesting exposition in Sunday Times Magazine of Dec 5th by Kevin Toolis on the tax policy lunacy, which led to the "property boom" and the "bankrupt" (not financially) politicians’ involvement.  My apologies to my Albanian language colleagues, but you can regain the page at your leisure.

petagny:
Martin Wolf always has something useful to say. Here's an extract from an article that appeared in the FT on 23 November:


'Ireland is nothing like Greece. Back in 2007, Ireland’s net public debt was just 12 per cent of gross domestic product. This compares with 50 per cent in Germany and 80 per cent in Greece. Spain, too, had net public debt in 2007 at just 27 per cent of GDP. If the fiscal rules had been applied as ruthlessly as German policymakers say they now want (though their predecessors resisted their application to themselves in the early 2000s), they would have affected France and Germany more than twice as often as Ireland or Spain between inception of the eurozone and the current wave of crises.

It was not the public but the private sector that went haywire in Ireland and in Spain. In the low interest rate environment caused principally by chronically weak demand in core European countries – Germany’s real domestic demand was a mere 5 per cent higher in 2008 than in 1999 – asset prices and credit exploded in several peripheral countries, particularly Ireland. An expansionary monetary policy has to work in much this way, somewhere. Moreover, until November 2007, spreads of Irish and Spanish public debt over German levels were next to zero. Nor is it surprising that private suppliers of credit failed to discipline the boom: they caused it.'

In a sense, then we can see the Irish problem as being rooted in German economic policy and we should see the fiscal crisis as being a symptom rather than a cause.

John Short:
The Irish Budget and various supporting documents to be found at
http://www.budget.gov.ie/budgets/2011/2011.aspx

Quotes from Minister of Finance's speech
"Our income tax system, as it stands today, is no longer fit for purpose.......Our system is also unduly complex. With four separate charges on income, each rational in its own terms, it contains too many distortions, steps, and discontinuities. Our goal must be to create a system that is rational, sustainable and fair, and that delivers the resources needed for essential public services..........high earners availing of tax incentive schemes must contribute more in the current difficult circumstances............The National Recovery Plan contains a commitment to the abolition or the curtailment of tax expenditures and to the phased abolition of property-based legacy reliefs. The 16 measures identified in the Plan will be given full legislative effect. Today, I will abolish or restrict a further nine reliefs bringing the total to 25. "

There are other indirect tax measures for revenue generation and growth related tax measures, but the ending of these distortions begs the question - how did policy makers allow the tax system to reach this situation - or did the politicians get the advice and just ignore it? The horse is gone, the stable door is shut; can it be enticed back?   

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