What are counter cyclical policies and how should they have been applied to Ireland ?

HellsAngel

I know very little about economics and commerece etc. However I McCreavey stating the pro cyclical policies shoudl be applied to Ireland and we had nothing ever to worry about, the "soft landing" etc

I have Googled regarding counter cyclical policy and got vague answers such as the following which isn't much good- " Government policy aimed at reducing or neutralizing anti-social effects of economic cycles. Such policies encourage spending during downturns, and tighten credit during inflationary periods. "

http://www.businessdictionary.com/definition/counter-cyclical-policy.html

So if anyone can help me, what are counter cyclical policies and how should they have been applied to Ireland a few years back ?

paul71

A example wound have been the SSAI's brought in by McCreavey. It was designed to encourage people to save rather than spend at a time when inflation was high, it probably proved counter productive as the maturity date was too short and the ecomomy was still booming when the money became available thus adding to spending and in turn inflation.

thebman

paul71 wrote: »

A example wound have been the SSAI's brought in by McCreavey. It was designed to encourage people to save rather than spend at a time when inflation was high, it probably proved counter productive as the maturity date was too short and the ecomomy was still booming when the money became available thus adding to spending and in turn inflation.

Yes they really should have been implemented on the basis that the money saved would be put into peoples pension funds afterwards.

So many people just blew it on cars or used it to put deposits on houses.

Zubeneschamali

HellsAngel wrote: »

So if anyone can help me, what are counter cyclical policies and how should they have been applied to Ireland a few years back ?

A free market is inclined towards cycles of boom and bust. Counter cyclical Government policies would rein in the boom by raising tax money in the booming sector of the economy (and thereby accumulate a surplus, or at least pay down Government debt during the good times), and then spend the surplus (or borrow money) to stimulate the economy during the inevitable downswing.

In particular, Ireland should have reined in the construction boom by removing all incentives from the industry back in say 2002, no more first time buyers grants, mortgage interest tax breaks, Section 27 apartments etc. If that didn't slow it, start increasing stamp duty, apply it to first homes, or similar. This would have dampened property values, and raised a metric sh!tload of cash.

We also should NOT have blown every cent on expanding the PS wage bill. During boom times is a super-expensive time to expand Government spending. Instead the Government should focus on value and reining in inflation, and sock the money away.

The downturn would have come anyway, but Government spending would not have ballooned out of control, and we'd be sitting on a surplus going in, with the world's best credit rating, and the Government could then spend money to keep the economy ticking over, and get much better value than spending during the boom.

Unfortunately, this requires politicians to think in 10 and 20 year timeframes. It's much more tempting for them to buy votes during the good times by "spending it when you've got it", and then apply pro-cyclical hairshirt cuts when the bad times come, because, hey, sorry, folks, the cupboard is bare.

RichardAnd

Zubeneschamali wrote: »

A free market is inclined towards cycles of boom and bust. Counter cyclical Government policies would rein in the boom by raising tax money in the booming sector of the economy (and thereby accumulate a surplus, or at least pay down Government debt during the good times), and then spend the surplus (or borrow money) to stimulate the economy during the inevitable downswing.

In particular, Ireland should have reined in the construction boom by removing all incentives from the industry back in say 2002, no more first time buyers grants, mortgage interest tax breaks, Section 27 apartments etc. If that didn't slow it, start increasing stamp duty, apply it to first homes, or similar. This would have dampened property values, and raised a metric sh!tload of cash.

We also should NOT have blown every cent on expanding the PS wage bill. During boom times is a super-expensive time to expand Government spending. Instead the Government should focus on value and reining in inflation, and sock the money away.

The downturn would have come anyway, but Government spending would not have ballooned out of control, and we'd be sitting on a surplus going in, with the world's best credit rating, and the Government could then spend money to keep the economy ticking over, and get much better value than spending during the boom.

Unfortunately, this requires politicians to think in 10 and 20 year timeframes. It's much more tempting for them to buy votes during the good times by "spending it when you've got it", and then apply pro-cyclical hairshirt cuts when the bad times come, because, hey, sorry, folks, the cupboard is bare.

You're right, that's what should have happened. But really, there was no desire from the plebians for that to actually happen. Could you imagine if FF had pledged to rein in the spending and curb the growing property bubble back in 2002, would they have been elected? We all know the answer to that.

The problem isn't the politicians in the dail, that's merely a symptom. The real issue is that the Irish electorate doesn't think beyond the immediate so the election cards of the 02 and 07 elections all read spend, spend spend! Even in the last election, this still held true. I would wager that most people went to the polls thinking not of where they want Ireland to be in 10 years but of something far more pertinent to their present mind set; punish FF.

As a result, we now have a government that is simply the other side of the same card.

Zubeneschamali

RichardAnd wrote: »

The real issue is that the Irish electorate doesn't think beyond the immediate so the election cards of the 02 and 07 elections all read spend, spend spend!

Not entirely true, have a read of FGs 2002 manifesto, there is a huge focus on control of Government spending and getting value for money.

However, I take your point, as that's one reason FG were absolutely destroyed in 2002, and they put less emphasis on this in 2007.

Still, their 2007 manifesto did say:

PUBLIC SECTOR EFFICIENCY
AND BETTER VALUE FOR MONEY
During its two terms in office, this Government has overseen annual average growth in dayto-day exchequer spending (net voted current spending) of 11.2%, up from just 6.8% under the Rainbow Government. Spending growth peaked at 22% in 2001, just before the last election and is projected to accelerate again to 13% in this election year. This rate of spending growth has been far ahead of the growth in the economy and is not sustainable. There is a requirement to slow growth in day-to-day spending down towards the rate of growth in the economy. Fine Gael gives greater care and attention to securing ‘value for money’ and efficiency in the delivery of public services than has been the case over the last decade.

Slowing growth in spending to be the same as growth in the underlying economy is not counter-cyclical, but at least it is not insanely pro-cyclical like FF policy at the time.

Boulevardier

Perhaps the single most catastrophic pro-cyclical decision taken by McCreevy was the decision in the 2001-02 budget to cancel the measures he had introduced on foot of the Bacon report which had removed mortgage relief from non-principal private residences.

Had he stuck with that one single measure, there would probably have been a soft landing in the residential property market around 2004-5.