Déjà Vu

“Indeed it was entirely through increases in taxation that the reduction in the primary deficit was achieved.  This also weakened the credibility of the government.   The failure to reduce public expenditure, or indeed the growth in the share of current expenditure in GNP, was a result of three factors.   First, the operation of automatic stabilizers, especially through a mushrooming of income support resulting from the sharp rise in unemployment.  Second, a conscious decision to maintain (and even, to improve) the real value of income support payments in an attempt to shelter the worst off from the fiscal adjustment.  Third, the inability of the government before 1987 — a coalition of trade-union and middle class interests without a parliamentary majority — to agree on the elimination or curtailment of any significant programmes [fn. Other than the deferment of some public investment plans] or to implement real wage rate reductions in the public service.   This last factor had a most debilitating effect on confidence in the government’s determination to set things right, especially considering the repeated government announcements that such retrenchment would be inevitable.” (p. 205)

Honohan, Patrick. (1989), “Comment on Rudiger Dornbusch, Credibility, Debt and Unemployment: Ireland’s Failed Stabilization,” Economic Policy, 4(8), pp. 202-5.

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