Irish Economy and Budget

4 Dec

Following the prosperous times of the Celtic Tiger period came an economic collapse in 2008, which saw Ireland enter recession for the first time since 1980.  From roughly 2002 until 2007, Ireland’s growth dynamic changed in many fundamental ways. The economy continued to experience high growth rates, but this was based on the rapid expansion of credit and a build-up of personal debt by individual households. This was fuelled, above all else, by rising property prices. Widespread bank lending to Irish citizens, while the banks were actually borrowing short-term from abroad was the main support for the property bubble.  When the bubble burst, banks failed and found themselves in huge amounts of debt, irretrievable from its borrowers.  The Irish government decided to act by issuing a guarantee of Irish debt, and recapitalizing these liabilities using public funds.  This crisis caused Ireland’s massive current debt, as a result of loans taken out from the IMF, on extremely high interest rates of almost 9%.  The Irish government has been fighting with the EU to balance its budget, in order to promote growth and to begin paying back it’s loans.

Ireland’s past financial troubles brings us to the current 2014 budget.  With Ireland leaving the bailout as of December 2013, Germany and the European Central Bank (ECB) have put pressure on Ireland to balance it’s budget.  The two powerhouses wanted Ireland to put into place austerity practices in order to reduce expenditure and increase tax revenue.  This way, Ireland could begin reducing its large budget deficit that will hamper it’s economic activity for the foreseeable future.  The government has been told by the ECB to put in place  €3.2 billion in budget cuts, however the irish government put in place €2.5 billion for 2014.  In terms ot increasing revenue, the government has increased its DIRT tax on savings from 33% to 41%.  Alcohol and cigarettes will be taxed at an extra 50c and 10c respectively.  The main point of this budget was the property tax set to double next year.  The things that surprisingly remain unchanged in this budget are the 12.5% corporate tax rate and the 9% VAT for tourists. There have been significant cuts in welfare systems.  However, the government has set up €200 million in stimulus for capital projects.  One new program introduced by the state has been free health care for minors under the age of five.  Overall, the current steps the government is taking to fix the problems of the past look very promising, and it’s only a matter of time we see the effect on the growth of the economy.

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