Observación no participante

proposalhasthevirtueoflimitingtheincreaseinexpenditureinanup As entitlements change those on jobseekers’ benefit receive job allowances paid from through general taxation. Together in 20 accounted for €4.6 billion, compared with just over €1 billion as rec five years ago. These numbers do not include all the benefits pe entitled to when hit by unemployment. The distinction between th categoriesdoesnotappeartobeuseful.Iftheobjectiveistoencourag back to work with lower welfare entitlements this could just as easily achievedbyvaryingpaymentsinapureentitlementsscheme.Ithardl sensetointroducemeanstestingafteralongperiodofunemploymen woulddiscouragepeoplefromsavingtomeetunexpectedevents.The crisis indicates the poor level of support, relative to income, for peo become unemployed, yet even this is difficult to finance. This sugg people need to make provision directly themselves to cover the ‘rai saving to maintain mortgage payments and other expenditure and not penalised for this by having welfare payments reduced. The tax encourageshomeownershipandpensionprovisionagainst

forms of asset holding, yet it is the more liquid assets that are need unemploymenthits.Thissuggeststhatthesetaxbenefitsbereduced.

he optimal approach to the use of fiscal policy as a sh stabilisationtoolwouldbetouseittodirectlyreduceactivitylev theeconomyisabovepotentialandtostimulateactivitywhentheeco underperforming. There are practical reasons deriving from an ina foretellthefuturethatmakesthisimpractical.Thenextbestalternativ betoallowtheautomaticstabiliserstowork;thesewoulddampenac an upturn, generate budget surpluses or lower deficits and wou financetheimplicitstimulusinadownturn.Thepracticalreasonaga istheinabilityofsocietytoseeanupturnasanythingotherthatnorm stagingpointforincreasedpublicexpenditureandtaxreductions.H automatic stabilisers are

T

policies.Theproposalmadeinthispaperisverymucha‘leastbad’ andisessentiallytoreducetheextentoftheautomaticstabilisersbyred

introductionofaFiscalCouncilthatwasinapositiontocreatea‘rainyday’ . not a major re is the ously in ficits, a noted ldeficits ows the ereisa e wider shifting ro zone neinthe through onomy resulting at since ro zone, pattern rlier for ings by had in Ireland e demand for thesame activity ). sofpro taxes or e public crisis (Durkan We now nomyis not a normal economy (Durkan, 2009). The bubble distorted the whole economy, affecting the pattern of output, employment and costs, and produced many goods (houses) that have not been sold, financed by borrowingfromabroad.Thecollapseoftheconstructionsectorandthebubble culturesomeofthemoreseriousmistakesofthepastcouldbeavoided

It is important to note that the inability to forecast the future does preclude the use of fiscal policy in all circumstances. In the case of recession, such as that experienced at present, forecasting the futu least of the problems and, generally, where budgets were previ balance with no structural deficits or only minor structural de countercyclicalpolicyinthemajoreconomieswouldbeappropriate.As earlier,theproblemsforsmallereconomiesandthosewithstructura would be eased by coordinated policies. The current depression sh difficultyofhavingcoordinatedpoliciesevenwithintheEU,whereth natural forum for coordination although without sanctions, or at th OECDlevel.Fiscalpolicycanalsobeusedaspartofanexpenditure exercise as would have been appropriate for Ireland when the eu started.Thefallininterestrates,whichwasanticipated(andthedecli euro, less anticipated), was set to give the economy a stimulus increasedprivatesectorborrowing(andexports),atatimewhentheec was fully employed. A fiscal contraction would have reduced the pressure on resources. Conefrey and Fitzgerald (2010) argue th national governments can no longer use monetary policy in the eu theyshouldusefiscalpolicy,orrathertargetedtaxes,toinfluencethe of demand for housing. This is consistent with the proposal ea reducing tax benefits that determine the pattern of asset hold households, though clearly where a housing bubble takes hold, as it Ireland, more may be needed to choke off demand. The problem in

was that when demand for housing weakened, government provided additional tax incentives for ‘investors’, thereby increasing th

housing–theveryoppositeofwhatwasrequired.Itisironicthatat timegovernmentwasprovidingthistaxbenefittoencouragehousing itwascontractingactivitytoprotectthepublicfinances(Durkan,2008

Thecurrenteconomicandfiscalcrisishighlightstheconsequence cyclical fiscal policy. Expanding in an upturn, whether by reducing increasing expenditure, creates a structural deficit and leaves th financesparticularlyvulnerableinadownturn.Atthebeginningofthis there appeared to be already a significant structural budget deficit 2008), and this very fact militated against a major fiscal stimulus. appreciatebetterwhatwashappeningintheeconomy.Thebubbleeco

reducestheeconomytoalowerlevelofoutput,but,asthisisnotatr business cycle, there is no traditional recovery, as the pattern of financed by external borrowing, will not be repeated. The econom growfromthislowerlevelofoutput,butishamperedbythelevelof debt,thecostsofprovidingfundstothebankingsystem,thenecessary incommercialbanks’viewofrisk,thelossofcompetitivenessincurre the bubble, and the need to correct the public finance imbalance. Th finance position was particularly serious as the revenues associated bubblewereveryquicklyembeddedintaxchanges,takingpeopleo tax net, reducing tax rates and the average level of taxes. Exp increaseswerealsoincurred.Insomecasesprogrammeswereexpand education,wherelongstandingproblemswereaddressed,whilethe morerelaxedattitudetopayincreasesandgeneralexpenditure.The wasmuchworsethananormalbusinesscyclewouldproducewiththe procyclicalpolicy,sincetherecannotbeanormalrecovery.Withthe ofthepublicfinancepositionthetaxandexpenditurechangescouldn be contained within a sustainable budget. A donothing policy wo quicklyleadtoalevelofpublicdebtthatwouldincreasewithoutlim independentlyofthebankingcrisiseffects,asinthe1980s.Itstill case that if the real rate of interest is greater than the real growt economy, then debt levels are dynamically unstable. If invest particularly productive then this condition is modified (Durkan However, it is clear from the revised National Development Plan th been inadequate cost benefit analysis of th

aditional output, y has to personal change dduring e public with the utofthe enditure ed,asin rewasa situation usual collapse olonger uld very it,quite remainsthe h in the ment is , 1994). ere has e capital programme. It is also thatjust ject,and f eability eisalso deficits. ance to highlights once again the y funds leastat paperis ngtaxes will certainly depress the level of output in the economy and will have no effect on domestic interest rates so that there is unlikely to be any shift to private activity as government borrowing falls. The level of the private savingsratemayfallwhenemploymentandthepublicfinancesstabilise,and necessarytocarryoutexpostanalysisofprojects,asitmightappear

becauseaprojectcomesinontimeandwithinbudgetitisagoodpro thismightbeusedasevidenceforsimilarprojects.

Itisthebubble characteristico thepresentsituationthatlimitsth ofgovernmenttoadoptaneutralorexpansionaryfiscalstance.Ther the question of the ability of government to finance larger budget Financial institutions are under no obligation to provide fin government at rates that suit governments. This

need for accumulated surpluses, the creation of even larger rainy da byboththepublicandprivatesectors,andtheneedforcoordinationat theEUlevel. Thereisnoeasysolutionto thepresentcrisis, butthis notaboutthat,butwhathappenswhenthecrisisisover.

thiswillraisethelevelofoutput,butisnotagrowthstrategy.Gover lookingtotheneworsmarteconomyandthecontinuedattractiono enterprisetobetheengineofgrowthtoresolvetheunemploymentc this may be too optimistic; Bergin et al. (2010) paint a different depending on world growth. Both assume a continuation of declar policy. The su nmentis fforeign risis,but picture ed fiscal ggestions in this paper are for when the economy returns to budgets. ndfallsfrom 2010. uarterly Institute. Policyand

le, CONEFREY, Thomas, FITZGERALD, John and KEARNEY, Ide, d Social M., 1985, nd Social egulatory ce by the eCentralBank. itsandFiscalPolicy’in‘IrishEconomicPolicy: Social I Budget ference. . onouring Kenmare. aDublin

GAVIN Michael and PEROTTI, Roberto ‘Fiscal Policy in Latin America’, NBER MacroeconomicsAnnualVol.12.

KEARNEY, Ide, MCCOY, Daniel, DUFFY, David, MCMAHON, Michael, SMYTH, Diarmaid ‘Assessing the Stance of Irish Fiscal Policy’ in Budget Perspectives

balanced

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