An Understanding of the Irish Economy from 2005 through 2008 - Term Paper Example

Ireland Economy The economy of Ireland grew by 5% in year 2007, but in 2008 it reported a negative rate of growth. According to the voxeu.org website, the economy and social Research Institute prospected a -0.4% GDP growth in 2008. While compared to the 2007’s growth of 5.3% and the previously reported growth rates since 1990s, this would be a huge decline. Also going in line with these trends were the terms of trade movement leading to a real income rate of -2.6% in year 2008. A recovery of the real income rates was projected and 2009’s rate would stand at 20%. The basic cause for the economic decline was mostly attributed to the housing sector’s contraction resulting to a prospected fall of total investment by around 15% in year 2008 and a further, decline of 4.5% in the following year. Despite this decline, the export sector proceeded in its growth, with a very strong services export. However, the export growth would be below the expectations due to the fall in the competitiveness of costs. The government’s fiscal policy was highly blamed for the GDP fall with the balance of government declining to 0.3% in 2007 from 3% in 2006. The projected level for 2008 was -2.8%. Especially notable during this period was the reduction in tax revenues in Ireland due to high dependence on taxes that are asset based such as stamp duties upon transactions of housing. The stamp duties were little since there had been a slowdown in the market of housing as well as house prices. The decline in Irish, national index of house prices in real terms since January 2007 was 17.7 %. ( Lane, 2008) This study is set out to analyse and develop an understanding of the Irish economy from 2005 through 2008. To achieve this there will be comprehensive answering of the question, “How successful has the Irish government been in running its economy for the last three years? And which are the main macro-economic policies utilised by the Irish government and the EU over the same period?” (A) How successful has the Irish government been in running its economy for the last three years? Since mid 1990s the economy of Ireland had a steady evolution. The external as well internal reviews regarding the Irish industrial policy reflected high dependence upon FDI though weakly embedded. The industrial sector was not up to the desired international standards. Subsequent to these reviews, the main recommendations were that the economy should improve its capability technologically, upgrade on its human capital and also provide an investment innovation conducive environment. (Remoe and OECD 2005 p 49) Ireland had left many mouths agape for the last two decades by how it transformed itself from one of the poorest economies of Europe to one of the most rich which led to its getting the nickname “Celtic tiger”. Recently, however, the economy has been hard hit by the world economic slump combined with a crash in its housing sector’s fall. This has seen to the nationalising of Anglo Irish Bank which is the country’s 3rd biggest lender and the government is cornered though it refuses to admit to be seeking IMF (International Monetary Fund) aid. The forecasts are that the unemployment levels will go as high as about 400,000 by the end of year 2009. This is about 10% of the Irish population since it is estimated to be having a population of 4.2 Million. In 2007 unemployment rate was just 4%. The projected growth in GDP is -4% as compared to the 2007’s 7%. The Irish Business and employers Federation’s senior economist O’Brien Fergal argued that the wage inflation stood so high at 20% and this leading to Ireland’s loss of their previous competitive edge. One of the impacts of this lost glory is the withdrawal of the USA’s company of computers, Dell which employed about 4300 people in Ireland. This company aimed at relocating to Poland’s third biggest city, Lodz. This firm was the country’s second ranking employer in the private sector besides being its largest exporter. Its contribution to the Irish GDP was around 5% in the recent years. Another obstacle coming in the way of Ireland is the euro currency which it adopted in year 1999. Its fall against the sterling pound was an unforeseen event and thus resulting to most shoppers in Ireland going to Northern Ireland to secure cheaper products. This cross-border business is taking up to around 2-3% of consumer expenditure in Ireland. The chamber of commerce of Ireland, which is new, approximated the customers crossing the borders over Christmas of 2008 were about 40%. This led to the call by the Irish minister for Finance, Lenihan Brian, urging the shoppers to show patriotism. Most people are now warned that the nation would return to its dismally performing times of before 1994. The GDP growth between the year 1994 and 2007 was an average of 10% per annum. In pursuit of curbing the decline of the Irish economy private firms are already requesting their workers to accept pay cuts. There is also the pressure on the Irish public sector to replicate the same by cutting pay to prevent the finances of the government from falling by about 14 billion in two years’ time. The prime minister of Ireland, Cowen Brian in early 2009 argued that it was right for a trade unionist to say that IMF is likely to impose pay cuts on the public sector. (Wachman and McDonald, 2009) As written in the website of finfacts an Irish economic analysis website, Cowen is not impressive in performance. Cowen and his government have not shown any interest to reform or change the country soon. This country is described as a nation with a political system that is broken in the middle of a serious economic crisis. (Hennigan, 2009) In March 2009 the average prices of Ireland declined by 1% as per the permanent tsb/ESRI index of house prices in Ireland. In February there was a fall by 0.8%, January’s was 1.4% while in December 2008 0.9% as per 12 month estimates the nationwide prices deeped by 10.0%. From February 2008 to February 2009 these housing prices fell by 9.7%. Emanating from these reported declines, the prices of houses in Ireland have gone back to the levels of November 2004. As the General Managers for Business strategies O’Grady puts it, there has been improved affordability in housing but despite this the customers do not have confidence in the Irish results of the economy and this they opt to stay away from the market of property. (Finfacts team, 2009) From 1995 to 2007, the Irish GDP growth was approximated to be 6% as per the estimates of the world factbook. However, economic activity in this nation had a sharp drop in 2008 as it went into a period of recession as the global financial crisis set in. After the 2008 occurence there was a severe fall in construction and property markets. Property prices increased up to 2006 than in any developed nation over a decade. Its per capita GDP was higher than the USA’s in 2007. In the year 2008 the government of Ireland led by Cowen intervened to ensure guarantee on all deposits of banks, make sure that its banking system was recapitalised and establish venture capital funds that are partly – public due to the economic slump of this nation To illustrate the economic slow down of Ireland in the recent times some statistics covering the three years from 2006-2008 are going to be utilised. For instance the Purchasing Power partly (GDP) in US $ was as follows: Year US $ 2006 184.2 2007 195.3 2008 191.9 (World factbook, 2009) Fig 1 200- - US$ 190- (Billions) - 180- - 0 2006 2007 2008 year To illustrate change on the national output, on the other hand, data from the same website showed GDP to be growing as follows: Year Rate of growth (%) 2006 5.7 2007 6.0 2008 -1.7 (World fact book, 2009) Fig 2 7 - 6 - 5 - 4 - 3 - 2 - 1 - 0 2006 2007 2008 year -1 - -2 - (B) Which are the main macro-economic policies utilised by the Irish government and the EU over the same period?” In the Irish economy, the mostly applied economic policy is the fiscal policy. In 2009, most of the analysis by the government after budget is aimed at balancing spending and taxation. Theirs is a 5 year plan that targets a 3% in 2013. The goal is either to be achieved by raising taxes to certain targets by 2012 or 2013 or by lowering expenditure in the same period. (CIA.gov, 2009) In year 2007 the EU commended Ireland on its fiscal policy regarding public finances. This was according to EU a good example of macroeconomic policies in line with EU stability and Growth pact. The European commission assessed the Irish programme on economic stability and said that the then Finance minister, Cowen had sound measures for the nation over the coming years. The EU however, said despite the macroeconomic policies, there were risks concerning a decline in residential construction sector. (RTS NEWS, 2007) Through high taxation rates Ireland enjoyed a considerable tax revenue increase up to 2006 and this also triggered high public expenditure than any other country of the OECD members. Public finances were now at a state of stability. However, after 2007 tax revenues have been seen to decelerate in an alarming rate. Therefore, after 2008, current spending needs to be raised by a rate of 7.7%. Of essence is to slower the current expenditure in the following years after the plan. Expensive expenditure has to be avoided. Based on these public services expectations are increasing as expenditure by the government slows. The reviews of money as per 2008 were being taken in all departments of the government. MIF- Management Information Framework had been enhances across the whole government. As per the plan, what was needed after this was to consolidate the whole framework. Also, the constraints of the budget upon expenditure needed to be stricter and this would be in accordance with the top-down approach on management of expenditure as stipulated but the new budget that had a unified framework. A budget framework that is multi –annual on current expenditure needed to be made stronger. This strengthening was to be in all lines of the introduced model as per other countries’ approach. This was set to avoid fluctuations on year-to-year that are sharp as well as much expenditure during times of high revenues. (OECD.org, 2008) EU also works with Fiscal policies as its main macro-economic policy on economies of member states. In 2008 there was a Euro group meeting and the concerned were Finance ministers from Europe. The key agendas to be looked at in the meeting were that the financial crisis had not been sorted and thus the region was in an economic crisis already. The second one was that Europe was to adopt fiscal policies as group, but not as individual member countries as was the case before. The figures of year 2008 were revised downwards and in the second half of 2008, a net contraction had been realized. As a counter-measure, the Eurogroup president jean Claude, urged the concerned to use the essential economic policies due to the economic slump. The agreement, according to him, had been reached and a budgetary policy that is counter-cyclic was adopted so as to build the stability of EU and at the same time achieve growth as per the 2005’s growth pact. (euronews.net, 2008) Conclusion While concluding, one can see from the findings that the economy has been performing well in the recent past. However, the global economic crisis of 2008 made the Irish economy fall sharply and it is very hard for the current government of Cowen to convince its citizens of the soundness of its policies. This is while answering the questions, “How successful has the Irish government been in running its economy for the last three years? And which are the main macro-economic policies utilised by the Irish government and the EU over the same period?” Work Cited: CIA.gov. Ireland. (2009). Retrieved May 13, 2009 https://www.cia.gov/library/publications/the-world- factbook/geos/ei.html Euronews.net. EU finance ministers signal turning point in fiscal policy. (2008). Retrieved May 13, 2009 http://www.euronews.net/2008/11/04/eu-finance- ministers-signal-turning-point-in-fiscal-policy/ Finfacts Team. Average Irish national house prices fell by 1.0% in March 2009; Down 10.0% in 12-month period; National prices now back to November 2004 levels. (2009). Retrieved May 13, 2009 http://www.finfacts.ie/irishfinancenews/article_1016526.shtml Lane, Philip. The Irish slowdown. (2008). Retrieved May 13, 2009 http://www.voxeu.org/index.php?q=node/1349 Michael, Hennigan. Brian Cowen And His "Educated" Government On Its First Anniversary . (2009). Retrieved May 13, 2009 http://www.finfacts.ie/irishfinancenews/article_1016526.shtml Oecd.org. Economic survey of Ireland 2008: Adapting government spending to lower revenue growth. (2008). Retrieved May 14, 2009 http://www.oecd.org/document/28/0,3343,en_2649_33733_40442460_1_1_1_1,0 0.html Remøe, Svend and Organisation for Economic Co-operation and Development. Governance of Innovation Systems: Case studies in innovation policy. OECD Publishing. (2005). Rte News. EC commends Irish fiscal policy. (2007). Retrieved May 13, 2009 http://www.rte.ie/news/2007/0207/budget.html Wachman, Richard and McDonald, Henry. Why the Party’s Over In Ireland. (2009). Retrieved May 13, 2009 http://www.guardian.co.uk/business/2009/jan/18/ireland-economy-crash Read More