- The Washington Times - Tuesday, May 20, 2003

The economic problems that America faces — slow growth, rising budget deficits at all levels of government, too few jobs and a business climate that’s not especially suited to producing new enterprises — are pretty much a mirror image of what Ireland faced just a few years ago.

The accepted wisdom of too many of our politicians, unfortunately, says that we can’t afford much of a tax cut, or even that we can tax ourselves out of hard times. For Ireland, what worked is exactly the opposite.

And so, what I’d suggest is that these politicians take a break from beating the drums for more taxes, or for smaller tax cuts, and look at how Ireland reversed its economic slide.

Benjamin Powell, writing in the winter 2003 issue of the Cato Journal, summarizes how quickly Ireland moved from the bottom to the top: “Ireland was one of Europe’s poorest countries for more than two centuries. Yet, during the 1990s, Ireland achieved a remarkable rate of economic growth. By the end of the decade, its GDP per capita stood at $25,500, higher than both the United Kingdom at $22,300, and Germany at $23,500.”

In 1987, after decades of high taxes and undue government interference in the Irish economy, Ireland’s GDP per capita was only 63 percent of the United Kingdom’s. Half a century ago, for instance, the end product of the Irish government’s protectionist trade policies was a constraint on export growth and overall economic expansion. “In the 1950s, average annual growth rates were only 2 percent, far below the postwar European average,” writes Mr. Powell. “That dismal performance was reflected in massive emigration that reduced Ireland’s population by one-seventh in the 1950s.”

With freer trade policies in the 1960s, with fewer tariffs and less top-down managing of exports and imports, Ireland doubled its average annual rate of GDP expansion to 4.2 percent, roughly the same rate as in the rest of Europe.

What followed, unfortunately, was over a decade of what Mr. Powell calls “fiscal mismanagement,” a period from the early 1970s until the second half of the 1980s that was “characterized by Keynesian policies that led to a fiscal crisis,” a period of bigger government, expanded public-sector spending, expanded government borrowing and greater attempts by government bureaucrats to centrally manage the economy.

The result was less growth, higher levels of government debt and hefty tax increases designed to reduce the expanding budget deficits. Mr. Powell sums it up: “Ireland tried to boost aggregate demand through increased government expenditures — a policy that failed to revive the Irish economy. Between 1973 and 1986, Ireland averaged 1.9 percent in expansion of GDP per year,” i.e., a growth rate lower than in the 1950s.

“Unleashing the Tiger, 1987-2000” is how Mr. Powell describes Ireland’s dramatic turnaround. What ended Ireland’s fiscal crisis of low growth, high taxation and runaway government debt was “a radical policy shift,” a 1987 reform program that produced unprecedented cuts in government spending, something that’s hardly on anyone’s agenda in Washington.

“In order to bring Ireland’s budget under control, health expenditures were cut 6 percent, education 7 percent, agricultural spending fell 18 percent, roads and housing were down 11 percent, and the military budget was cut 7 percent,” writes Mr. Powell. “Foras Forbatha, an environmental watchdog, was abolished as were the National Social Services Board, the Health Education Bureau, and the Regional Development Organizations. Through early retirement and other incentives, public sector employment was voluntarily cut by nearly 10,000 jobs.”

In short order, by 1989, following this full-scale reduction in the government’s role in the economy, Ireland’s GDP was growing at 4 percent per year, more than double the rate of growth in the 1973-1986 period. Subsequent cuts in taxation and tariff rates pushed the levels of economic growth even higher in the 1990s, to an average rate of GDP expansion of 5.14 percent per year from 1990 through 1995, and an average annual rate of 9.66 percent from 1996 through 2000.

The top marginal tax rate on personal income, for instance, as high as 80 percent in 1975, was cut to 56 percent in 1989 and to 44 percent in 2001. The standard income tax rate, at 35 percent in the mid-1980s, dropped to 32 percent in 1989 and to 22 percent in 2001.The corporate income tax rate, 40 percent in 1996, fell to 24 percent in 2000. The result? “Ireland,” reports Mr. Powell, “now enjoys a lower tax burden than any other EU country except Luxemborg.” Measured in terms of total tax revenues as a percentage of GDP, Ireland’s overall tax bite in 1999 was 31 percent, appreciably lower than the EU average of 46 percent.

What works, in short, is freedom. Less government and lower taxation produced more growth and higher incomes. Or, as Mr. Powell says it: “Government actions that hinder people’s ability to engage in mutually beneficial exchanges limit the standard of living that the people are able to achieve. As Ireland increased economic freedom, per capita GDP rose.” And, as a footnote, so did population as emigration was cut. Ireland finished the 1990s with a population growth rate that was higher than any other EU nation.

There’s a lesson in all this for the big spenders in Washington, and it’s not that we’ll get to the promised land through more central planning and high taxes.

Ralph R. Reiland is the B. Kenneth Simon professor of free enterprise at Robert Morris University and a Pittsburgh restaurateur. E-mail: [email protected]


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