Wall Street Journal Gives Irish Economic Policy the Thumbs Up

SPANISH two-year government-bond yields climbed five basis points to 2.47pc on Monday morning, after Fitch last week cut Spain's triple-A credit rating to double-A-plus. Ireland, on the other hand, has been making do with its diminished rating of double-A-minus since November. And yet yesterday morning, the yield on its two-year government bond was at 1.77pc, down seven basis points from the day before, although its 10-year yields remain elevated.

Meanwhile, both the OECD and the EU's statistics agency predict that Irish growth -- still slightly down for this year -- will pick up to 3pc in 2011, well above their average forecasts for the overall eurozone. What a difference credibility makes.

On the surface, Ireland is in the same trouble as its euro brethren, if not worse. Its deficit-to-GDP ratio last year hit 14.3pc, meaning its apparent ability to pay was even more dubious than Greece's.

The small, open economy was hit early and deeply by the financial crisis and its credit-driven construction bubble popped to reveal a pile of uncovered entitlement promises.

Dublin, along with just about every other red-ink-spattered national treasury, responded by making all the right noises about cutting spending.

So what makes Ireland special? Its political leaders are doing it -- and have been since October 2008. The 'Celtic Tiger' economy was born out of of Ireland's last fiscal crisis in the mid-1980s, another tale of runaway public spending. That eventually spawned supply-side tax cuts to restart public-sector initiative, which allowed for uninterrupted growth from 1994 through 2007.

But while Dublin has learned the importance of non-government enterprise, it couldn't resist indulging itself during the fat years.

Government spending rose by 138pc in the decade before the crash, against economic growth of 72pc, according to Constantin Gurdgiev of Dublin's Trinity College. By September 2008, the national debt was €46.96bn.

Though Ireland's rags-to-riches-to-rags story is more dramatic than most, this tale of rampant government expansion is essentially the same one that Spain, Portugal, Italy and Greece have to tell.

Eighteen months ago, all knew that their welfare states had become unsustainable. But along with the US, they devised ever more lavish Keynesian spending schemes in the name of boosting 'aggregate demand', even as they continued to blow up their own balance sheets.

Ireland wasn't immune and was one of the first European governments to guarantee bank deposits, to the tune of €485bn, along with a 'bad bank' scheme whose price keeps mounting. But Dublin simultaneously told its citizens to get ready for emergency spending cuts and proved it by slicing 10pc off government wages in October 2008.

By April 2009, Ireland had cut public spending by €1.8bn. It also managed to squeeze additional tax revenue out of its strapped citizens, though it achieved this largely by broadening the tax base, for instance by including minimum-wage earners, rather than targeting hikes only at the wealthy.

Crucially, Ireland maintained its 12.5pc corporate tax rate. By the end of last year, Dublin had implemented spending cuts and tax hikes worth about 5pc of GDP.

Turns out they had barely begun to slash. In July 2009, a special board commissioned by the Government presented its report, showing €5.3bn in potential savings for that year alone. The suggestion that made Irish headlines was its recommendation that more than 17,300 public sector jobs could go, along with its note that the Department of Arts, Sports and Tourism could be eliminated.

The Government used the report to cut its 2010 Budget by €4bn and is going through its recommendations to find a further €3bn in cuts for 2011.

So far, public sector workers have seen their pay slashed by up to 20pc, the State's child benefits have been cut by roughly 10pc and unemployment and other benefits have been similarly gutted.

Athens, Madrid, Lisbon, Rome and the rest have finally begun to follow suit, finally having caught on that they can't spend their way back to prosperity.

The last year-and-a-half of Irish asceticism is now seen as Europe's Ghost of Frugality Future and politicians around Europe could do worse than to look at Ireland's cuts as a model.

But as University College Dublin's Colm McCarthy, the chief architect behind the Irish cuts, told us last week: "Anyone can produce programmes (to cut spending). The issue is have they taken the measures?"

Market-watchers remain sceptical that Greece or Italy will make good on their promises, largely thanks to their citizens' outrage at the merest mention of public wages freezes.

Meanwhile, the Irish people deserve credit for greeting their government's attempted return to fiscal sanity with, well, sanity. Protesters and strikers have hit the streets of Dublin since the cutting began, but they have not shut down entire cities and violence has been negligible.

Perhaps the Irish, having seen this before, better realise the dangers of runaway public spending.

It hasn't hurt that Ireland's ruling party, Fianna Fail, has been in the public-opinion doldrums since the start of the crisis, meaning they've had little to lose -- other than their arrears.

ASIDE from bond yields that aren't as high as others in the eurozone, the rewards for Ireland's early frugality have been slow to come. Unemployment remains in the double digits and citizens know there is more pain to come, even if growth does pick up next year.

But as the OECD pointed out in its report last week, the fact that Dublin let living standards shrink along with demand has meant that: "The notable improvement in Ireland's price and cost competitiveness could allow growth to pick up more quickly than expected."

There's no pretending that Ireland's cuts don't hurt in the meantime, or that they would be any easier for Spain, Greece, Italy or Portugal to take on.

But as one of Ireland's less austere sons, satirist PJ O'Rourke, once noted, "You can take 10pc off the top of anything." Can, and did. (©Wall Street Journal)