Let me start with the government finances. After the dramatic budgetary correction of the late 1980s, this was not expected to be a problem. Indeed, as shown in Chart 1, Ireland ran a balanced budget on average for two decades before the collapse of 2008. It satisfied the deficit criterion of the Stability and Growth Pact (SGP) of the European Monetary System before it was invented. And there was no drift: indeed the deficits became smaller and turned into surpluses in the early years of the new millennium.
The Government debt to GDP ratio fell throughout this period reaching a low point of about 25 per cent in 2006-7. Interestingly, in most years the total value of debt outstanding actually increased, though with growth in GDP, both real GDP and the price level component, the ratio to GDP fell steadily.
So what happened in 2008? There was no really significant policy change – OK there had been some late-cycle relaxation in budgetary discipline in 2006-7.
But mainly it was that the policies that had delivered steady surpluses suddenly stopped delivering. Obviously we know what happened, the property prices had stopped rising at the end of 2006, capital gains were down, transactions had slowed dramatically, construction had contracted. But my point is that as an indicator of the sustainability into the future of the public finances, the SGP rules were not adequate. A country could run a surplus for years and yet the structure of its tax receipts and spending rules could leave it vulnerable to a sudden crippling turnaround in the deficit and a rapid accumulation of debt. The SGP points to what may be necessary, but are certainly not sufficient, conditions for sustainable public finance policies.