By Ben Ramanauskas, Policy Analyst
With punters pouring into pubs today for St Patrick’s Day, let’s talk about Ireland. It has pulled off one of the most impressive economic u-turns in recent memory.
The Republic was hit particularly hard by the global financial crisis and subsequently fell into recession. It was long considered one of Europe’s poorest nations, with one third of the population living in poverty as recently as the 1980s. In the aftermath of the financial crisis, the national debt was unsustainably high and investors were demanding 14 per cent returns on Irish Treasury bonds - similar to the levels expected of Greece and Portugal. Perhaps worst of all, unemployment reached 15 per cent and many young people had no choice but to leave the country in order to find work.
In order to avoid total economic collapse, the Irish government was forced to take a hand out from the IMF, the European Central Bank, and the European Commission. Up to £3.25 billion of this was funded by taxpayers in the UK, with the final repayment not expected until 2021.
Ireland was in a mess. But not for long. Remarkably, it has since managed to turn things around. Unemployment is down, exports are up, and it is enjoying high levels of economic growth. While many EU countries are still reeling from the recession and experiencing sluggish growth, Ireland is doing very well.
So, how did they find that pot of gold at the end of the rainbow?
First, Ireland realised that it had to start living within its means. They cut back wasteful government spending and sought out savings. Too few people realise how important this is, as high levels of government spending are bad for productivity and economic growth. For example, research by the IFS found that: ‘...apart from government investment, all government expenditures have negative marginal effects on productivity and GDP growth’. A study conducted by the OECD reached the same conclusion. Research from the University of Michigan found very similar results.
When governments are not careful with taxpayers’ money, or when they spend it on the wrong things, then the economy suffers. Productivity decreases, so economic growth remains low and, unsurprisingly, living standards stagnate. Ireland shows us that when governments take a sensible approach to public spending, precisely the opposite happens.
Second, it tackled the national debt and borrowing. High levels of national debt lead to economic growth slowing. Interest also has to be paid on the debt, meaning that taxpayers’ money, which otherwise could be spent on funding essential public services, is instead handed over to bankers. Government borrowing is also bad news for the economy. It crowds out other investment as investors loan money to greedy governments, instead of to entrepreneurs.
Ireland had a very high national debt, which was growing larger every second, fuelled by irresponsible levels of borrowing by politicians. By tackling the debt and the deficit, the Irish government was able to kick start economic growth and bring prosperity to the country.
Finally, it has taken a sensible approach to taxation. As many people know, it lowered corporation tax to 12.5 per cent. This is roughly half the OECD average and significantly lower than in other small European countries. Why does this matter? Corporation tax is, in the words of the IFS, ‘one of the more damaging taxes on growth’. It’s so damaging because it discourages businesses from investing in their companies. This is true for all types of businesses, but it hits companies in innovation-intensive industries, such as technology firms, particularly hard.
When Ireland lowered its corporate tax rate, it attracted some of the largest technology companies in the world. These businesses have brought investment, jobs, and economic growth to the country. What’s more, the taxes paid by these businesses and their employees have funded essential public services and allowed the government to tackle the national debt. And so the benefits come full circle.
Ireland has turned things around over the past few years. It has gone from being borderline bankrupt to enjoying booming business and a growing economy: reducing government spending, tackling the national debt, controlling borrowing, and competitive corporate tax rates. The winners in all this are the Irish people, who are now enjoying the many benefits of high levels of economic growth.
The UK government could learn a thing or two from the Ireland. Instead of wasting taxpayers’ money on vanity projects such as HS2, the government should prioritise spending money on the things that matter and find ways in which other savings can be made. Although steps have been taken to reduce the deficit, now is not the time to be complacent. The national debt looks set to balloon over the coming decades. The tax-burden is at an almost 50-year high. If the UK wants to attract businesses and investment, it needs to continue to cut corporation tax.
So, this St Patrick’s Day, raise a glass of Guinness to Ireland and it’s remarkable economic recovery. Not too many though, as people in the UK are still paying one of the highest rates of beer duty in the world.