IRELAND Trouble on the horizon?. Fiscal Policy 1987 – Smaller government less taxes less...

IRELANDIRELAND

Trouble on the horizon?Trouble on the horizon?

Fiscal Policy

1987 – Smaller government less taxes less spending

1998 - Budget surplus

1998 to 2001 Debt to GDP ratio dropped from 74.1% to 36.6 Debt reduced by 8.5 billions euros

Debt and Deficit to GDP Ratios

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1993 1994 1995 1996 1997 1998 1999 2000 2001

Per

cen

t o

f G

DP

Deficit(-)/Surplus(+) Debt

Corporate Tax Rates

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Foreign Direct Investment

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Mill

ion

s o

f U

S D

olla

rs

Monetary Policy

Controlled by the ECB

Irish economy not primary basis for ECB actions

Interest rate in line with rest of EU

IS-LM Model

LM

IS0 IS1

Inte

rest

rat

e (r

)

r0=r1

Y0 Y1 National Income (Y)

Savings and Investment

FDI accompanied by increases in domestic investment

Focus on improving education in 1980’s resulted in more efficient workforce

Housing boom detracted from technological investment

GDP Components as a Percentage of GDP

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Mill

ion

s o

f E

uro

s

Net Exports

Investment

Gov't Spending

Consumption

Impending DOOM?

Pro-cyclical Fiscal Policies

Overinvestment in housing

Trouble from EU over corporate taxes

Actual growth

Average growth GDP

time

Recommendations

Property Tax Revenue Neutral Encourages Investment in Technology

Keep government spending low Allows more flexibility during downturn

Combat EU pressure to raise Corporate tax Assess likelihood Use political pressure to thwart Consider raising corporate tax to lessen rate gap and

soften shock

Questions, Answers and Guinness