Rethinking the political economy of fiscal consolidation in two recessions in Ireland

Ireland has been taken to be an exemplary case of successful growth-promoting
fiscal retrenchment, not once but twice – first, in the fiscal consolidation
undertaken in the late 1980s, which was taken as one of the classic original
instances of ‘expansionary fiscal contraction’, and again now, in the context of
meeting the fiscal deficit targets set by the current EC-ECB-IMF loan conditions.
This paper argues that many of the apparent lessons drawn from Ireland’s
experience turn out to be more complex and even misplaced upon closer
inspection. Ireland was never an instance of ‘expansionary fiscal contraction’ in
the sense in which it now understood, in the late 1980s; and the conditions that
facilitated the restoration of growth at that time are no longer possible now.
Firstly, the paper shows that standard methodologies for identifying the object of
interest in fiscal consolidation misses out on what is really central, which is the
ongoing politics of ‘fiscal effort’. Secondly, this approach challenges conventional
ideas about the primacy of spending cuts over tax increases. Thirdly, Ireland’s
fiscal stabilization in the earlier period depended on devaluation, international
growth, and strong social pacts. None of these conditions is present in the
‘internal devaluation’ under way since 2008. Ireland has committed to fulfilling
the terms of the EU-ECB-IMF loan programme, but there are few grounds for
anticipating that this will of itself result in the resumption of growth. Fiscal
adjustment efforts are much more painful without the growth-promoting
contextual conditions that were present in the earlier period.