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Will the cuts work? Just look at Ireland

Just across the Irish Sea a right-wing government has been pursuing much the same the policies as the present Coalition for two years now. The results have been disastrous.

One doesn’t have to look far to see that the “cuts won’t work”. Just across the Irish Sea a right-wing government has been pursuing much the same the policies as the present Coalition for two years now. The results have been disastrous.

When the recession hit, the Irish government choose not to launch any sort of fiscal stimulus and instead set about cutting spending (and raising taxes) in order to balance the budget, much as George Osborne urged the UK government to do.

However, as we have argued in the UK case, trying to balance the budget in the context of a still distressed economy will not work. Spending cuts and tax rises take demand out the economy and lead to lower growth and higher unemployment. In the worst case scenario this can lead to a higher deficit as welfare spending rises and tax revenues drop. This is exactly what has happened in Ireland.

Over two years on from the adoption of austerity economics the deficit is higher than it was in 2008. Unemployment now stands at 13.6% and the economy, after record declines in 2009, has recently slipped back into recession. The countries bonds have been downgraded to bear junk status, amply demonstrating that simply attempting to cut your way out of recession is no guarantee of bond market approval.

In December 2009 Finance Minister Brian Lenihan argued that the savage budget for 2010 would resolve the Irish crisis. One year later an even more savage budget has been introduced.

Right wing UK commentators who have urged the Coalition to cut have been amongst Ireland’s loudest cheerleaders over the past year.

Now that Irish policy has obviously and undeniably failed they have started to argue that Ireland is very different form the UK, that the real problem is the size of banking sector and it’s membership of the euro.

In reality even excluding Ireland’s unwise bailout of its bloating banking sector (and the UK banking sector was near equally bloated) the deficit is still high as the cuts take hold. It is cuts in government spending that have driven unemployment to 13.6% not a bailout of the banks.

Whilst euro membership has certainly not helped Ireland, other member-states have reacted to the crisis in different ways, by stimulating their economies rather than cutting (including supposedly “austere “ Germany). As a result the recession has not hit them as hard, unemployment is lower and budget deficits are lower.

Ireland was once held up by George Osborne as a “shining example of the art of the possible in economic policy making”. Let’s hope he doesn’t still believe that. Evidence suggests he does. 

Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.

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