Fiscal Policies in Ireland

Fiscal Policies in Ireland

NameCourseCourse instructorDate of submissionThe economic crisis that arose from the failures of the Irish banking system combined with sharp decline in economic output and rise in unemployment rates necessitated exceptional measures which included direct, monetary and fiscal policy interventions. This was aimed at solving the liquidity shortages and problems associated with solvency that were negatively affecting banks operations and subsequently economic performance. Fiscal policies are the main stabilization tools employed by the European central bank as well as by most members of the Eurozone. In the national macroeconomic level, public spending and taxes directly influence spending and production in the whole economy. At a more microeconomic level, these interventions influence the outcomes of specifically targeted market sectors. Countries use fiscal sectors according to their goals i.e. whether the country desires a large public sector or a small one.

In 2008, the republic of Ireland suffered a large fiscal deficit which implied that the country had been relying more on tax revenue from temporary sources for her public sector expansion programme. Stability requires adjusting to the dynamics of the fiscal balance. This is to mean that a country should run surpluses in boom periods to cushion against revenue lost during recessions, this is more so important for Ireland as a member of the EMU since she does not have the option of adjusting the nominal exchange rate as a means of offsetting fiscal errors (Ireland. 2010).

Faced with these challenges, the government of Ireland was faced to make decisions to bridge the output gap. The first step was to make a distinction between temporary and permanent tax revenues; this was mostly done by measuring the temporary and permanent GDP aspects. This though is a challenge to an open small economy as Ireland due to capital inflows and labour mobility affecting the permanent GDP (Ireland. 2011). The asset markets had been another area where the tax fluctuations had originated. Capital appreciation and the cyclic boom – depreciation periods were also major contributors. This meant that public spending was being done on monies from a boom windfall and as such the reduction to the GDP to public ratio was not maintainable at the surplus levels held.

The government also initiated micro economy channeled fiscal policies, these policies apply for example in the property market where the government will change taxes and subsidies in order to increase or decrease taxes according to the prevailing situation. Changes in employment taxes to contract or expand the public sector and influence disposable incomes are also one of the approaches employed (Blundell, 2011). The government also put in measures to manage the public sector payroll with the aim to strike a balance necessary to alleviate the problems with the encyclical nature of public services and the cyclical nature of the sectors funding.

Figure 1 % change in GDP

Source: www.economy.comBy February 2009, the GDP growth of Ireland was already decreasing at an increasing rate that peaked by April of the same year. The central bank and ECB started laying out strategies to stimulate production and consumption. This is necessary since A major Component of GDP is consumption and Investment and government expenditure (Y=C+I+G+(X-M) (Peterson, 1974). Thus the lending rates had to be reduced and currently rescind at (Courtesy of ECB Website) Marginal lending facility 1.5%, Refinancing operations and fixed rate tenders 0.75%). Deposits were discouraged and as thus Deposit facility interests remain at 0.00%. This is because Savings is the balance of income – consumption (Yd=Y-C)

Figure 2 Growths in Employment

Source: www.economy.com.

By June 2009, Ireland’s unemployment rate had started rising, this trend continued throughout the depression period and peaked at 15% by March 2012. Mitigation measures have seen a reversal of this trend though it is yet to emerge how manageable this will be.

Figure 3. % change in BOT

Source; www.economy.com

By July 2009, Ireland enjoyed a very favorable balance of trade. The trend started to reverse with a slowing export component and increased imports by July 2010 with a zero BOT being observed by mid 2011. Imports have been increasing at an increasing rate while the rate of reduction in exports has been increasing. From the first Quarter of this year, a stabilized export regime has been observed and it will hopefully continue (Blundell, 2011).

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Figure 4. % change in Inflation rates.

Consumer prices inflation rate was slowly rising by 2009 as was the trend in the world during the depression. With the onset of increased government expenditure and expansionary fiscal policy, this was inevitable. The producer prices inflation also followed this trend. With a semblance of normality beginning to be projected, a reduction in the percentage rate of increase has started to manifest itself (Ireland. 2011).

By and all, the expansionary measures taken by the Irish government appear to have started bearing fruit and the Republic is on a path to recovery. Though not a single measure can be pinpointed as the most successful, the overall outlook goods. This can also be closely associated to vigilant monitoring by state authorities as well as the ECB.

References.

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BLUNDELL-WIGNALL, A., & SLOVIK, P. (2011). A Market Perspective on the European Sovereign Debt and Banking Crisis. OECD Journal: Financial Market Trends. 2010, 9-36.

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IRELAND. (2010). Tuarascáil ar bheartas micreacnamaíoch agus rialachas éifeachtach fioscach agus eacnamaíoch / report on macroeconomic policy and effective fiscal and economic governance / Joint Committee on Finance and the Public Service. Dublin, Stationery Office.

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IRELAND. (2011). Medium-term fiscal statement: November 2011. Dublin, [Stationery Office].

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Moody’s analytics 2012. Economic indicators and forecasts for Ireland.(Onlinie) Available at: http://www.economy.com/dismal/outlook/country.aspx?geo=IIRL#tabs-1 (Accesed 1st Top of Form

PETERSON, W. L. (1974). Principles of economics: macro. Homewood, Ill, R.D. Irwin.

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Nov. 2010)