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Why our response to crisis isn't wrong

THE argument on Ireland's response to the global economic crisis goes something like this: governments in countries such as the United States and Britain have attempted to stimulate their flagging economies by resorting to a massive fiscal stimulus. We, on the other hand, have concentrated on reducing public expenditure, thereby taking money out of the economy. Since we are out of step with the rest of the world, we are therefore wrong. This betrays a fundamental misunderstanding of both the structure of the Irish economy and the essence of the Government's response to the crisis.

Firstly, the Government is spending to stimulate the economy. This year we will borrow more than five per cent of GDP to invest in capital projects. It is by far and away proportionately the largest capital programme in the EU. If the Government was not borrowing this money, the exchequer figures would, of course, look much better. This massive capital investment will need to be further refined. Capital spending will have to be re-orientated towards more labour-intensive activities. And the method of allocating large infrastructural contracts will have to be changed to enable smaller Irish firms to bid for them. The fundamental purpose of this investment in infrastructure will be to make the economy more competitive.

Secondly, we're a small, open economy. US President-elect Barack Obama has some chance that higher spending and lower taxes will benefit his domestic economy, but the calculation is totally different here. We tried the fiscal stimulus approach in response to the oil shock in the late Seventies. The increased spending power given to the Irish consumer largely leaked out on increased imports and left us in an even worse position. There is absolutely no evidence to suggest that the same thing would not happen again.

Thirdly, there would be a better case for some form of this approach if we want to believe the budget deficit would automatically disappear when the economy eventually recovers.

Certainly the deficit will reduce, but unfortunately there is a large component of it that will remain impervious to recovery. We have this structural deficit because the huge tax windfall from the property construction boom has disappeared but the greatly elevated levels of public spending that were financed by that windfall have not. Ultimately this structural deficit will have to be eliminated. However, there is no case for adding to an already large structural deficit.

In a small, open economy like ours, confidence, credibility and sustainability are vital factors in Government policy. They are vital to boost domestic confidence but also to attract foreign investment. The imperative now is to rebuild confidence in the Irish economy both at home and abroad. The only way to inspire that confidence is to be seen to make a determined effort to put our public finances back in order by bringing expenditure into line with revenue.

This applies especially to current public expenditure. Last year we borrowed substantial amounts of money to pay for day-to-day services, and this year we will have to borrow even more. This is not sustainable and it means that the interest on this borrowing will consume more and more taxation that could have been spent on paying for services.

The approach taken in the late Eighties of focusing on restoring stability to the public finances increased business and consumer confidence and restored economic growth. It more than outweighed any direct impact on the economy from spending cuts. Again, there is no reason to believe that cannot and will not happen again.

From Ireland's point of view, the best sort of fiscal stimulus are those being put in place by our trading partners. Ultimately these will boost demand for our exports without costing us anything. What we need to do is to ensure that we are well positioned to avail of the opportunities that result from our trading partners' actions.

Willie O'Dea, TD, is Minister for Defence

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