Will Australia follow Ireland? Kohler

Ireland’s misery carries lessons for all, but especially for Australia.

Those marching in the streets of Dublin over the weekend, as well as more than a few economists, reckon the whole thing is a travesty, with bankers being bailed out at the expense of the living standards of innocent, ordinary people.

Nobel Prize-winning economist Paul Krugman had a column in the New York Times last week headed ‘Eating the Irish’, in which he concluded: “You have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.”

Economist Dean Baker, writing in The Guardian, says Ireland should default on its debt like Argentina did in 2001. “…it was politically impossible for the Argentine government to agree to more (IMF) austerity. The immediate effect was to make the economy worse, but by the second half of 2002, the economy was again growing. This was the start of five and a half years of solid growth.”

“Tell the EU and IMF to shove it,” recommends Mike Whitney, writing in the political website, counterpunch.org.

But it’s a bit more complicated than that. The Cowen government’s four-year ‘National Recovery Plan’ issued over the weekend makes it clear that the problem with Ireland is not so much that bankers plundered the country, which they did, but that the government itself is underwater.

Corporate tax in Ireland was reduced to 12.5% in the mid-90s, which led to a wonderful boom in IT manufacturing – the creation of the so-called ‘Celtic Tiger’.

After 2002, when Ireland joined European Monetary Union and adopted the euro, the two things combined to create a massive property boom and, in essence, the government was able to replace corporate taxes with much more revenue from property taxes.

Between 2000 and 2008, the state pension doubled, average public service salaries increased 59%, the standard income tax rate fell from 26% to 20% and the top rate from 48 to 41%.

Despite this, Ireland, like Australia, entered the global financial crisis with low public debt. But its prosperity was built on the quicksand of a property bubble.

In 2007, stamp duty and capital taxes yielded €6.7 billion; this year that will fall to €1.6 billion. As a result, the budget deficit has ballooned to 11.7% of GDP, even after big spending cuts in the past two years, and gross public debt is suddenly at 95% of GDP, rising to 102 per cent in 2013.

It’s true that this is partly due to the nationalisation of the Anglo Irish Bank, which seems to have been Ireland’s version of Enron, but this country’s economic problems are not simply due to rogue banks getting out of control during the property boom.

The bigger problem was Charlie McCreevy who, as finance minister in two stints during the 90s and then again 1997, disastrously cut taxes and increased government spending.

Specifically, in 1997 he cut the capital gains tax rate from 40% to 20% and extended property tax concessions, which directly led to the explosion in property speculation, which in turn led to the collapse of the Irish banking system.

When the boom ended, government spending went from 28% to an unsustainable 44% of GDP.

Ireland thought the property boom would last forever and lived it up. Yes, the boom was created by out-of-control bankers and rich speculators, and the politicians took the government along for the ride, but in the end that doesn’t matter. Government spending now has to be cut even if bank bondholders are forced to lose their shirts.

Needless to say, the Australian government should learn from Ireland’s mistakes.

The amount of mining investment in the pipeline suggests that the next five to ten years will see a massive boost to national income and therefore government revenue.

It should be used for infrastructure, or saved – not for doing a Charlie McCreevy.

This story frist appeared on Business Spectator.

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