We can stop austerity – if Europe stops it first
Economist believes Ireland cannot ditch fiscal consolidation on its own
The special adviser hired by the late Finance Minister Brian Lenihan to help steer Ireland through its worst ever economic crisis believes that Ireland should move away from austerity – but only if the rest of Europe does so too.
Alan Ahearne, who advised Lenihan on three of our austerity budgets, was responding to the calls made by Ashoka Mody, a former IMF mission chief to Ireland, for the Irish Government to row back on austerity.
Last weekend, Mody said there has been little growth in the Irish economy over the last year-and-a-half, and that it was hard to believe that austerity was not part of the problem. Mody suggested that for the Irish economy to grow, there should be no more austerity for the next three years.
"Mody is an impressive economist and we should take his comments seriously," said Ahearne. "What he is suggesting is very radical."
Ahearne is a member of the Commission of the Central Bank of Ireland and an economics lecturer at the National University of Ireland in Galway. He believes Mody's suggestion would be "the best solution" for Ireland if the rest of Europe follows a similar path.
"If Europe were to introduce a fiscal stimulus plan right across the EU for the next three years, Mody's suggestion would be a good policy for Ireland," said Ahearne.
"We would get EU money injected into the Irish economy."
Ahearne, however, does not believe Ireland should row back on its austerity programme on its own. "If what Mody means is that we do this on our own, I don't agree," said Ahearne.
"This would be very risky for Ireland. People would be worried that if the country's growth doesn't pick up in three years' time, we'd still have all this fiscal consolidation to do. People therefore would be unlikely to loosen their purse strings, we wouldn't see growth as a result, and our economy would be in much worse shape."
Fiscal consolidation, which describes the tax increases and spending cuts that a government introduces to try to get a country back on its feet, is more commonly known as austerity.
Although Ahearne admitted that the fiscal consolidation of the last few years had depressed economic growth in the country, he said it was "absolutely necessary".
"Without it, this country would have gone completely bust," said Ahearne. "In 2007, about a third of the revenues coming into this country were coming from the property bubble. When the property bubble burst, those revenues were gone forever.
"This country's tax system and public finances had to be restructured. Fiscal consolidation has reduced our budget deficit [where a country spends more money than it earns]. It has also depressed growth – there's no doubt about that."
The IMF last week distanced itself from the comments made by Mody, saying his views did not represent the Fund's position.
The Tanaiste Eamon Gilmore said last week that the Government realises Ireland's road to recovery cannot be based on austerity alone.