A lesson for the US Government from Ireland

I’ve had a great deal to say on this blog about the mismanagement of the economy by the present Administration (and, to be fair, by its predecessors). Of course, the USA isn’t the only country to face economic turmoil at present. Ireland’s another country profoundly affected by the international financial crisis – but it seems to be handling it in a rather more economically sensible manner. I’ve highlighted a couple of important points in bold print.

… the Irish Government is taking decisive, responsible action.

High-paid public sector workers face 20 per cent pay cuts. Brian Cowen, the Taoiseach [the head of the Irish government, a position equivalent to Prime Minister], is leading from the front taking a fall in salary from 285,583 euros (US $417,865) to 228,466 euros (US $334,291). The welfare budget is being cut by 4.1 per cent.

Ireland had great economic success before the current recession. Back in 1986 it was held back by state intervention. Public spending consumed a massive 62 per cent of GNP. But then a new direction was undertaken by cutting back state spending.

By embracing policies of low taxation, Ireland was transformed from being among the poorest countries in Western Europe to among the richest. Lowest corporate tax rates meant it was a competitive country for multinationals to invest in and to benefit from the well educated work force. Unemployment fell sharply.

. . .

These policies brought sustained success over a period of 15 years. Some suggest that Ireland owes it all to subsidies from the European Union – but other economies have had just as hefty EU subsidies and continued to languish.

The world recession has certainly hit Ireland hard. Financial services had become a huge part of Ireland’s economy – leaving the country vulnerable. Mistakes were made over ineffective financial regulation allowing a property bubble, and public spending had been allowed to increase to an imprudent extent.

The budget presented by Finance Minister Brian Lenihan last week suggests that the Celtic Tiger could well get its bite back before long. Lenihan rejected resorting to tax rises saying: ‘We will not create jobs by increasing the penalty on work and investment.’ Crucially, Corporation Tax remains at just 12.5 per cent.

Lenihan also rejected the option of just continuing to borrow and hoping for the best. He said: ‘Some have argued we should continue to borrow and wait for the economy to grow again before tackling the budget deficit. There are three reasons why this is not a viable proposition.

‘First, we know from the 1980s how large deficits, left unchecked, can lead to a dangerous spiral of mounting debt and ever increasing interest payments. Never again should we return to a position where all of our income taxes go to pay interest on the national debt.

‘Second, international debt markets have become more crowded and more fragile. If lenders were to lose faith in our ability to restore order to the public finances, the consequences for our economic well-being would be profound.’

‘Third,’ he added, ‘only decisive action will restore confidence. Consumers will only start to spend and business owners will only invest and create jobs if they believe we are tackling our deficit problem now.’

Lenihan added: ‘In our everyday lives we do not borrow to pay for our household bills. We cut back and seek to live within our means. The same strictures apply at national level. Borrowing hundreds of millions a week to pay for day to day spending is just not on. Stabilising the deficit is the next key milestone in our plan to deliver economic recovery for this country.’

Lenihan had to make some tough choices on public spending. The elderly have been protected, with no cuts in state pension. But elsewhere the savings are widespread.

Subsidies for everything from housing to the arts are being slashed. Surplus assets are being sold. Bureaucracy is being cut back. Unemployment benefit is being reduced because, according to Lenihan, ‘a welfare system out of step with labour costs in the rest of the economy can trap people in protracted joblessness.’

Not everyone will agree with the choices he made. But at least he had the guts to make them.

There’s more at the link.

If only President Obama and his Secretaries, Czars and finance experts could take a leaf from Ireland’s book, instead of running the Federal deficit into the trillions as they are! Our children will curse our memory one day, you know . . . and they’ll be quite justified in doing so, because we’ll have crippled their economic future with our spendthrift policies today.

Peter