Posts By Robert Sweeney


The Collapse of Ireland’s Finances (again): A Reinterpretation

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As the election season reaches full swing, the inevitable claims of who did what and when, and what this means in the future intensifies. One oft-repeated tale beginning to reemerge is that an expansion in public spending during the 2000s is a, or perhaps the leading cause of the subsequent financial and debt crisis. After all, as seen below, the crisis manifested itself in an explosion of the public deficit and overall debt, which eventually culminated in an inability of the government to borrow from financial markets in 2010. While the topic has been much-discussed, it’s worth going over this again as there are several misunderstandings, and some questions which I think elements of the left have had difficulty answering too.


Notes: The Fiscal Balance and Adjusted Balance are shown on the left-hand side, Expenditure and Debt are shown on the right-hand side. Adjusted Balance taken from IMF’s World Economic Outlook. All others are taken from Eurostat.

The most obvious counter to the argument that bloated public spending was at the centre of the crisis is to point out the actual trajectory of fiscal policy in the 2000s. As shown above, Ireland actually ran a surplus (blue line) in all but one year of the 2000s pre-crisis, and also had one of the lowest debt-to-GDP ratios in the developed world. As a proportion of national income, spending increased, but quite modestly considering the low base. Thus, if anything, it was a model of fiscal prudency.

The counter to this is that, yes, the headline deficit was actually a surplus, but this masks underlying structural weaknesses. As we all know by now, the surpluses arose because of transient taxes such as stamp duty and other bubble-related windfalls. There was an expansion in public spending and the headline surplus was in reality a deficit (or as economists would say there was a structural public deficit). This was hidden by a basket-case economy, which delayed the inevitable collapse. In reality, the state was spending money it didn’t have – government profligacy in the form of excess spending has been a root cause of our woes. This can be seen clearly by the evolution of the cyclically-adjusted government balance, which clearly shows a large deficit from 2001 on.

A not inconsiderable portion of the left have difficulty answering this, and as a result it weakens the case for greater public investment in services, infrastructure, and so on. One response is to point to the costs of the bank bailout. Another is to repeat the point that the public finances were in surpluses. Another criticism is that it is in practice impossible to measure a structural deficit: that is, one cannot disentangle structural versus cyclical components of the deficit. I think all of these answers are somewhat weak, and leave open the charge of denial.

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The Case for Penal Levels of Taxation

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Budget 2013 drew few surprises. Income tax, including the top rate on high earners, was, as expected, not touched. Somewhat surprisingly for a coalition including Labour, the budget was deemed less progressive than previous budgets.1 With Sinn Féin and the ULA both proposing to increase the top rate of tax (as well as a wealth tax), the debate on how high or low taxes should be is sure to remain around for some time. I propose that not only are high top tax rates justified in general, but actual penal levels of taxation on high earners are too.

Economically, advocates of not increasing the already ‘penal’ rates on high earners any further argue that it would be a disincentive to work and would have adverse economic effects more generally. To be more precise, they argue these high earners or ‘wealth/job creators’ will stop conjuring employment and riches for the masses and pack up and leave for greener pastures. Of course, there’s plenty to say about this. Is it really believable that people would pack-up and leave for a different country – including taking their children out of school – because their tax liabilities have been increased by a few points.

Economic arguments aside, what rate of taxation is fair?

As many readers are no doubt aware, Paul Krugman pointed out in the Irish Times a few weeks ago that during 1950s, the so-called Golden Age of Capitalism, the top tax rate in America was over 90%.2 Is this fair? I suspect many people would say this is indeed penal and point out that business leaders and CEOs excel at what they do, innovate, invest, help create jobs and wealth, and so on. Progressives and leftists who support higher taxation tend to struggle when this argument is put to them because, essentially, the argument has a lot of merit.


A person earning €100,000 is likely to be more competent than one earning €30,000 in the same field – or at least better at applying his or her skills to profit-making. As well as perhaps being more competent, the former is likely to be more innovative because he or she is likely to be higher up the hierarchy and, as such, has more decision-making power. Because he or she will have been promoted to get the top, the meritocracy argument carries some weight, though with qualifications.

For one, innate ability and hard work, though important, are not the only determinants of success. A wealthy person is likely to have been born into wealth. As such, he or she will have been given more opportunities and encouragement. A poor person will likely have had fewer education opportunities, and whose way of life – how he or she dresses, speaks etc. – is denigrated by society. If born into poverty, even the very capable (whatever that means) are unlikely to have the confidence and social skills to excel.

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