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How did Austerity Affect Ireland?

How did Austerity Affect Ireland?

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Author

Rory O'Farrell

Summary

Presentation made to Finnish Delegation (MANDATE offices)

Since 2008 the Irish economy suffered a massive fall, with one in every seven jobs being lost. There are two reasons for this. One is the collapse of a banking and construction bubble. The other reason is the effect of austerity.

Since 2008 construction employment has been particularly badly hit (with the number of jobs in the construction sector going from over 250,000 in 2008 to under 100,000 by 2013). Other sectors were also hit. In retail, ten per cent of jobs were lost, and weekly wages fell by 4.3 per cent (though weekly wage falls have been due to cuts in working hours rather than in pay rates). Investment in Ireland has fallen to a historically low level of 11 per cent (compared to a long run average of 21 per cent). This is due both to a collapse in private investment (due to a lack of access to credit as a result of the banking crisis, and some over-investment that occurred during the boom period); and a fall in public investment (from €9.5 billion in 2008 to €2.6 billion budgeted for 2014).

Beginning in 2008 (but largely taking effect from 2009), the Irish Government undertook a huge programme of austerity. Consolidation now runs at about €30 billion in total, or over 18 per cent of the Irish economy. The majority of this has been in spending cuts (roughly two thirds) and only one third through revenue increases. This is despite the Irish Government taking in one of the lowest levels of revenue of the entire EU (and far lower than our peer countries in Western Europe). Stripping out banking crisis related costs and interest payments; the Irish deficit has fallen from 8.8 per cent of GDP to 2.3 per cent, an improvement of 6.5 per cent. This is not much progress given that over 18 per cent was taken out in consolidation. The poor performance is because cuts do not equal savings. Spending cuts suppress the economy meaning the Government takes in less money through taxes, and ends up paying more money in unemployment benefits. The Economic and Social Research Institute (ESRI) estimate that consolidation of €3 billion only reduces the deficit by approximately €1 billion.

Domestic demand has been hard hit, shrinking by almost a quarter. Though the export sector has not been hit as hard, the lack of investment in public infrastructure reduces the potential of this sector to grow in the years to come. Also a reflection of the weak state of the economy has been price deflation. Between September 2008 and January 2010 prices fell. Though inflation is not of itself a good thing, the fact that it has been so low for so long is a reflection of the weak state of domestic demand. Though there was a brief spell of deflation immediately following the Second World War, one must go back to 1933 to see an instance of deflation as severe as that which has recently occurred in Ireland.

In a study of Ireland’s austerity budgets from 2009 to 2013, the ESRI found that they reduced income inequality. However, the effects of austerity on increasing unemployment, or cuts to public services (for which those on low incomes rely on to a greater degree) were not included. In a separate study focusing on the years from 2010 (therefore excluding the year 2009 which included two austerity budgets) the ESRI find that by 2013 austerity reduced employment by 3.5 per cent (about 65,000 jobs), the economy was 3.2 per cent smaller than would otherwise be the case, and private consumption was lower by 7.1 per cent.

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