Austerity : an examination of fiscal concentration in an open economy with fiscal and monetary restrictions, the case of Ireland

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McHugh, Brendan
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MBA in Finance
Dublin Business School
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This research is both timely and of the utmost relevance, given that the implementation of aus-terity fiscal policies has impacted Irish society and its economy in the wake of a post financial crisis. It has consequences for every household and its legacy will be measured by future generations. Much debate has ensued surrounding the perceived necessity of such a drastic contractionary policy. Yet no study has ultimately proven whether or not austerity will work for Ireland. The aims of this research are: to establish the reasoning behind the implementation of austerity; how its elements were used as instruments to improve fiscal balance sheets; did these policies have to be contractionary; was there a viable alternative as in the case of Iceland- and it assesses the progress of austerity to date in Ireland. Initially this research gets to the heart of that debate by understanding austerity and then peeling back the theoretical layers of its components, and how these different measures of austerity impact on an economy. Through a method of qualitative interviews, the author was able to apply the economic theories and opinions examined for secondary research to the case of Ireland. On application of these concepts, it was found that a lot of the theory was simply that-theory, with little real life efficacy in an Irish context, given the many limitations its government had at a time when drastic fiscal decisions had to be made. This research also found that the Irish government of the day had little other choice than to implement these contractionary policies, as Ireland was experiencing an unsustainable level of debt, combined with a growing deficit and the reluctance of the bond markets to let them borrow. Ireland’s involvement in the EU-IMF bailout- which proved necessary- and its membership of the Eurozone from which they have prospered from in recent decades, proved to be major restricting factors in fiscal and monetary policy decisions. An important theory that should be acknowledged by Irish fiscal decision makers(which the author found in the secondary research and was able to support through their primary research) is that the raising of taxes has a more profoundly negative effect on an economy than cuts made to government expenditure. In the conclusion, the researcher recognises the many adverse socio-political effects re-sulting from austerity- but highlights there are indications to show that austerity is being effective, demonstrated by the sharp decline in the Irish budget deficit and its ability to return to the international bond markets. These findings, however, may be immature as Ireland still finds itself in an EU-IMF bailout situation, with a very high Debt/GDP ratio and a severe unemployment rate. Further research will be required on this matter in the future in order for a conclusive verdict on the effectiveness of the austerity fiscal policies. Author keywords: Austerity, Ireland Economy, Economic Recovery, Fiscal contraction, Fiscal consolidation, Fiscal multiplier, taxation, government expenditure, Iceland recovery model, economic policy limitations, open economy, austerity effects, economic theory, EU-IMF, bailout, Eurozone, socio-political effects