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Home Publications Blogs Beat the Press Ireland: A Textbook Example of the Dangers of Balanced Budgets and Fiscal Responsibility

Ireland: A Textbook Example of the Dangers of Balanced Budgets and Fiscal Responsibility

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Wednesday, 17 November 2010 05:53

Ireland is in the headlines these days as its government struggles with insolvency. Remarkably, none of the news stories remember to point out that Ireland was a model of fiscal responsibility in the years leading up to its current disaster. Not only did it balance its budget, Ireland ran large budget surpluses in the 5 years preceding its collapse in 2008. Its peak surplus in 2006 was 2.9 percent of GDP, the equivalent of a surplus of roughly $420 billion in the United States.

Like the deficit hawks in the United States, Ireland's political leaders ignored the country's massive housing bubble, the collapse of which sank its economy. It is interesting to note that, while Ireland's background to the deficit crisis is generally ignored, news reports on Greece's financial difficulties routinely referred to its large budget deficits in the years leading up to the crisis.

Comments (8)Add Comment
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written by merijn knibbe, November 17, 2010 9:22
The same holds for Spain.
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written by izzatzo, November 17, 2010 10:02
It is interesting to note that, while Ireland's background to the deficit crisis is generally ignored, news reports on Greece's financial difficulties routinely referred to its large budget deficits in the years leading up to the crisis.


In economics, this is known as Teabagger Alzheimer Syndrone, caused by an expectations horizon so short that present value and future value merge into one number, consistent with the total absence of memory beyond yesterday.
revenue
written by ts, November 17, 2010 11:07
As with the U.S., the Irish deficit is more about a collapse in revenue than spending.

http://hydeproperty.com/property-information/90-ireland-revenue-expenditure-graph
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written by PeonInChief, November 17, 2010 12:04
Ireland's budget surpluses disappear from the discussion because they don't fit the "European governments spend like drunken sailors, providing services that they can't afford, taking long lunches (especially in France), long vacations, and generally not being Anglo-Saxon in origin" story line.
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written by O'Malley, November 17, 2010 12:09
Let's also not forget how some notable Tea Baggers praised Ireland's extremely low corporate tax rates as proof that the Irish model was the one to follow. Has a single one of them addressed the current situation in Ireland? *crickets.* Has a single major journalist pressed them on citing Ireland as a model to follow? *crickets* Only in the USA!
Punch Bowl
written by PeakV T, November 17, 2010 5:58
Politicians never want to take away the punch bowl. That's what a central bank is for. Oh, wait, nevermind...
Your title is wrong! Ireland is a textbook example of not properly dealing with banking problems
written by MGKurilla, November 17, 2010 9:16
Ireland did not arrive at its current mess by running a balanced budget and being fiscally responsible. Rather, its current mess is due to the government guaranteeing insolvent banks. Just as the US ahs done, insolvency has been confused with liquidity. Here in the US we've allowed (or forced) the FASB to rewrite rules so that insolvent banks can be propped up with merely liquidity problems. If Ireland had chosen to go "Swedish" on their banks, the pain would have been sharp, but rapidly over.
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written by Calgacus, November 21, 2010 12:14
As Dean illustrates, the conventional wisdom is completely wrong. Government budget surpluses can be very dangerous, while deficits are normal and healthy. True, guaranteeing insolvent banks is extraordinarily stupid. But budget surpluses removing money from the economy force private debt to go to unsustainable bubble levels to sustain economic growth. "Fiscal responsibility" is sheer destructive insanity, causing utterly purposeless pain.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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