Ask any leftist for the solution to any problem, and the answer is invariably, “spend more money.” This comes out of the fairy tale that blowing it is what money was made for. Ireland, like the rest of us, loves fairy tales. It took the tax-and-spend route and landed in a crisis of choking debt. Now the Irish are sobering up. The Irish government last week thumbed its nose at the taxaholic recommendations of the European Union, and said Dublin would restrain spending while restraining corporate tax rates at the current low levels. It’s a choice that could put the country back on the path to recovering lost prosperity.
After the 2008 global financial meltdown, the European Central Bank, the European Union and the International Monetary Fund served up for Ireland the same prescription it gave to Europe’s other basket-case economies. Instead of letting banks proceed through orderly bankruptcy, the government took over about $82 billion worth of bad bank debt in exchange for bailout funds. The goal then, of course, was to prevent a chain reaction of bank failures in the rest of Europe. Irish taxpayers were stuck with the bill for the bailout.
Ireland’s finance minister has been trying something different. His latest budget includes tax cuts and a handful of tax increases, including a pernicious levy on the interest from savings. On the most important point, it holds the line at keeping the corporate tax at 12.5 percent, which is nearly half the average European rate of 22.8 percent. Raising the corporate rate would send business elsewhere, which would be particularly devastating for Ireland. Irish exports were valued at 108 percent of its gross domestic product in 2012, according to World Bank data, compared to Greece’s 27 percent, and Italy’s 30 percent.
The Irish budget includes $3.4 billion in spending reduction, which means Ireland will have cut spending 15 percent in real terms since 2008. To put that accomplishment into context, U.S. spending has increased 30 percent over the same period. Some Irish grandmas and grandpas will lose some of their generous health care subsidies. Ireland’s version of the Obamaphone is canceled. A rather generous funeral subsidy will get a decent burial. Capitol Hill, take note. This is how it’s done.
The payoff is that Ireland’s economy is out of the recession and expects to see 2.7 percent growth, an improvement on the rest of the European Union, which remains mired in recession. The trouble is far from over, with public debt level exceeding 123 percent of gross domestic product. But recovery is in sight. Though America’s debt hasn’t quite reached Irish levels yet, at the current rate of spending, we’ll be there soon. The Irish lesson should be taken to heart, and spending and taxes reduced before the American economy passes out.