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Irish economy in crisis

It’s not wholly surprising, but it seems possible that the meteoric rise of the Celtic Tiger could very soon be eclipsed by the current free-fall of the Irish economy.
Following on from news that the economy fell into recession in the second quarter of 2008 (with two consecutive quarters of declining GDP), new figures out today (but not yet reported on RTÉ!) put the exchequer deficit for the year to date (the Irish government now operates on a calendar financial year) at €9.4bn, with full year predictions of €11.5bn. Some of that deficit is for capital spending, which is, of course, seen as an investment, and therefore worth borrowing for (on the basis that increased capacity in the future will more than counteract the cost of borrowing the money today). However, much of the – unforeseen – deficit is for current spending, and results both from cost overruns and decreased tax revenues.
There is, of course, a difference between government spending and the broader economy, but in this case the government figures reflect trends in the economy that are quite worrying, as well pointing to the contribution of government policy to our current difficulties. Tax revenue is already €3.6bn behind budget, reflecting declining economic activity (as VAT and stamp duty revenue declines), weaker markets (with falls in capital gains taxes), and substantial job losses. Current spending is €600m above target, despite well-publicized spending freezes, due at least in part to the increase of 80,000 in the live register (=unemployed). The Irish government will breach the EMU deficit limits this year, with, as Joan Burton of Labour notes, “a General Government Deficit of 5.5% of a falling GDP.” Figures would be worse were it not for significant increases in non-tax revenues (which includes dividends from semi-state companies among other things).
A large part of the problem for Ireland has been that Ireland is a small ‘open’ market economy, making us particularly responsive to changes in the global economy. When the dot com bubble burst, the spectacular economic growth of the mid-1990s disappeared. Now that the global economy has entered a period of serious crisis, the Irish economy risks catching pneumonia.
With a 50% rise in the numbers unemployed in the past year – to their highest rates in 10 years – the St Vincent de Paul Society (one of the larger charities providing aid to the poor in Ireland) has seen a 40% increase in calls for help to its offices in Dublin in the past year, and expects to spend €50m on aid this year. Next year, for the first time in a decade, Ireland is expected to have net outbound migration.
The government response so far has been to bring forward announcement of next year’s budget (widely expected to be an austerity budget) and to issue guarantees on savings in Irish-owned banks – itself not a bad way to calm nerves and improve confidence, but not a well-thought out plan, as it immediately fell foul of EU rules, which means the government is going to have to extend guarantees to banks with an Irish presence (though hopefully only on savings held by Irish residents), which will bring the potential exposure to well over the initial estimate of €440bn. By contrast, Irish GDP last year (and remember, it’s dropping) was €190bn.