Sunday, 13 March 2011

The impact of cost competitiveness in Ireland

Slí Eile: Some assertions abound in the media and among 'informed' economist commentary. These are frequently based on ideology more than fact. Take two popular assertions:
- that public expenditure was 'out of control' in the years immediately prior to the crisis of 2008-2011
- that Ireland was losing export market share in the years immediately prior to the crisis because prices and wages were growing faster than elsewhere
In an article by Daniel Gros ('The Flawed Economics of the Competitiveness Pact' here) the latter assertion is put to the test and found wanting. Gros claims that 'competitiveness indicators by themselves are thus of very limited value in predicting export performance'. Ireland's share of EU27 exports, like that of Greece, Spain and Portugal, was remarkably constant over the period 2000-2010.
Regarding trends in public expenditure - there is no evidence to support the claim that levels were 'out of control' or excessive. Spending tended to track increases in GDP (or GNI) over the period to 2008 - leaving Ireland lagging below EU average levels. Eurostat data on General Government Expenditure shows a dip around in the % of GDP accounted for by public spending with a level of 41% in 1995 and 42% in 2008. After 2008 a number of factors kicked in including the escalating cost of social welfare bill due rising unemployment as well as the banking bailout in 2009/10.


Paul Hunt said...


I think it's also fair to observe that the MNC export enclave was able to maintian its performance while trying to minimise the impact of increasing costs in the domestic, non-tradable sectors - and that the GDP share of public expenditure (while not excessive by EU standards) was supported by an unsustainable taxation regime.

paul sweeney said...

Too true on the argument that Irish public "spending out of control" Mr Sli!

In fact, in spite of massive cuts in direct taxes, mainly done by the architect of Ireland's Downfall, Mr Charles McCreevy, AND also funding all capital investment from own revenues, in the ten years to 2008, current a/c revenue exceeded spending (which did rise fast)by a massive €58bn!

What if we cut less and put some of this surplus away, every year?
What a lost oppportunity! Where were the prudent conservatives then?

If the prudent Ruairi Quinn had been still running the show during the Domestic Boom, we be rolling in the dosh today!

It is so ironic that Ireland's first real hard-Right Wing Minister for Finance, Charles McCreevy blew the boom by grossly irresponsible economic policies!