LUẬN văn THẠC sĩ (KINH tế) an examination of fiscal contraction in an open economy with fiscal and monetary restrictions, the case of ireland

Austerity:Anexaminationoffiscalcontractioninanopenecon-Submittedinpartial fulfilmentof therequirementsof aMaster’sDegreeMBAinFinance BRENDANMCHUGH... ListofFiguresandTables...4 Acknowled

omywithfiscalandmonetaryrestrictions,thecaseofIreland.

Austerity:Anexaminationoffiscalcontractioninanopenecon-Submittedinpartial fulfilmentof therequirementsof

aMaster’sDegree(MBA)inFinance

BRENDANMCHUGH

2

ListofFiguresandTables 4

Acknowledgements 5

Abstract 6

1 Introduction 7

1.1 BackgroundandContext 7

1.2 AimsandObjectives 9

1.3 Approachto theResearch 10

1.4 RstionalefortheResearch 10

1.5 Organisationof Dissertation Error!Bookmarknot defined.1 1.6 ResearchLimitationsandScope Error!Bookmarknot defined.22 LiteratureReview 14

2.1 Introduction 14

2.2 AusterityandtheFiscalPolicyDebate 18

2.3 AusterityandExpansionaryFiscalContraction 21

2.4 AusterityImposedonIrelandandtheSocio-politicalIinferences 26

2.5 TaxationandExpenditureAdjustmentsandtheirEffects 29

2.6 IcelandicRecovery,MonetaryPoliciesandaFlexible ExchangeRate 32

2.7 FurtherExplorationofFlexible Ex/RatesandCurrencyDevaluation 36

2.5FiscalMultiplierandHow it isAffectedbyFiscalInstruments 40

3 Methodology 45

3.1 MethodsandDesign 45

3.2 ResearchPhilosophy 48

3.3 ResearchApproach 50

3.4 ResearchStrategy 51

3.5 Accessibilty 52

3.6 ResearchChoice 53

3.7 TimeHorizon 54

3.8 Sampling 55

3.9 DataCollectionMethods 57

3.10 EthicalConsiderations 59

3.11 Limitations 61

4 DataAnalysis andFindings 63

4.1 Introduction 63

4.2 AusterityConotationsandimplementationreasoning 65

4.3 FiscalContractionin a ShrinkingEconomy 68

4.4 GovernmentExpenditure,DebtLevelsandTaxation 70

4.5 FiscalMultiplierin aDepressedEconomy 74

4.6 IrelandandIceland;AComparitiveAnalysis 75

4.7 Socio-PoliticalimplicationsofAusterity 78

4.8 Assessmentof the Success orFailureofAusteritytoDate 79

4.8Conclusion 82

5 ConclusionandRecommendations 84

5.1 Conclusion 84

5.2 Limitationsof theResearch 91

5.3 Recommendations 92

6 ReflectiononLearningandSkillDevelopment 93

6.1 IntroductionandLearningStyles 93

6.2 TimeManagement 98

6.3 CriticalThinking 99

6.4 Numeracyandquantitativeskills 100

6.3FutureApplication 101

Bibliography 103

Appendices 113

Appendix1 PrimaryResearchInterviewQuestions 113

Appendix2InterviewGuide 115

Appendix3InterviewSynopsisA 117

Appendix4InterviewSynopsisB 126

Appendix5InterviewSynopsisC 133

Appendix6InterviewSynopsisD 139

Appendix7InterviewSynopsisE 148

Appendix8Consentform 158

Appendix9SolomanandFelderLearningStyles:Results 159

Appendix10MumfordandHoneyLearningStyles:Questionnaire 160

Appendix11MumfordandHoneyLearningStyles:Results 162

s t of T a b l es andC har t s

ListofFigures

Figure2.1:PIIGSUnemploymentComparison 16

Figure2.2:IrishDebtComparedto EurozoneAverage 25

Figure2.3:Export/ImportComparison–Ireland 39

Figure2.4:IMFForecastErrors 44

Figure3.1:ResearchOnion 47

Figure4.1: GeneralGovernmentFinancialBalances 66

Figure4.2:GrossFederalDebt/GDP–US(WarTime) 73

Figure4.3: GeneralGovernmentDeficit/GDP–Ireland 80

Figure4.4:IrelandGovernmentDebt/GDP 82

Figure6.1:Kolb’sLearningStyles 94

List ofTables Table1.1:IrelandEmigration/Migration2010-2012 8

Table2.1:Unemploymentrate,EUandEurozone 15

Table2.2:GovernmentSpending,DeficitsandGDP-IrelandandIceland 33

Table2.3: GoodsTradeSurplusFigures 40

Abriefappreciationtothosewhoassistedtheauthorintheconstructionofthisresearchpaper.P r i

m a r i l y o n e m u s t recogniset h e p r a c t i c a l guidanceaffordedtot h e m fromtheirsupervisorMichaelKealy,t h e ubiquitousfeedbackwasalwaysasource ofencouragement.T h e importanceofthe contributionmade bytheinterviewcandidatescannotbe overstated.Theirvaluabletimegivenandaptitudeconveyedthroughout,wastrulygratifying.Athankyout o friendsandcolleaguesforaidinginmanyvariouswaysthroughoutthisproject.AlsototheCentralBankofIrelandfortheirsupportandfacilitationwhenitwasneeded.Finallytoafamilyf u l l

o f inspirationandtheeverpatientandhearteningEmer,toyouallaprodigiousthankyou

Abstract

Thisresearchisbothtimelyandoftheutmost terityfiscalpolicieshasimpactedIrishsocietyanditseconomyinthewakeofapostfinancialcrisis.Ith a s conse quencesforeveryhouseholdanditslegacywillbemeasuredbyfuturegenerations.

relevance,giventhattheimplementationofaus-Muchdebatehasensuedsurroundingtheperceivednecessityofsuchadrasticcontractionarypolicy.Y etnostudyhasultimatelyprovenwhetherornotausteritywillworkforIreland.Theaimsofthisresearchare:toes tablishthereasoningbehindtheimplementationofausterity;howitselementswereusedasinstrumentstoimpr ovefiscalbalancesheets;didthesepolicieshavetobecontractionary;wasthereaviablealternativeasinthecaseo fIceland-

anditassessestheprogressofausteritytodatei n Ireland.Initiallythisresearchgetstotheheartofthatdebateby understandingausterityandthenpeelingbackthetheoreticallayersofitscomponents,andhowthesediffer entmeasuresofausterityimpactonaneconomy.

Throughamethodofqualitativeinterviews,theauthorwasabletoapplytheeconomictheoriesandopinionsex aminedforsecondaryresearchtothecaseofIreland.Onapplicationoftheseconcepts,itwasfoundthatalotofthe theorywassimplythat-

theory,withlittlereallifeefficacyinanIrishcontext,giventhemanylimitationsitsgovernmenthadatatimewhe ndrasticfiscaldecisionshadtobemade.ThisresearchalsofoundthattheIrishgovernmentofthedayhadlittleoth erchoicethantoimplementthesecontractionarypolicies,asIrelandwasexperiencinganunsustainablelevelofd ebt,combinedwitha growingdeficitandthereluctanceofthebondmarketstoletthemborrow.Ireland’sinvolve mentint h e EU-IMFbailout-whichprovednecessary-

anditsmembershipoftheEurozonefromwhichtheyhaveprosperedfrominrecentdecades,provedtobema jorrestrictingfactorsinfiscalandmonetarypolicydecisions.

AnimportanttheorythatshouldbeacknowledgedbyIrishfiscaldecisionmakers(whichtheauthorfou ndinthesecondaryresearchandwasabletosupportthroughtheirprimaryresearch)isthatt h e raisingoftaxesh asamoreprofoundlynegativeeffectonaneconomythancutsmadetogovernmentexpenditure.Intheconclusion ,theresearcherrecognisesthemanyadversesocio-politicaleffectsre-sultingfr om austerity-

b ut highlightstherea r e indicationst o showthatausterityi s b e i n g effective,demonstratedbythesharpdeclin eintheIrishbudgetdeficitanditsabilitytoreturntotheinternationalb o n d markets.Thesefindings,however, maybeimmatureasIrelandstillfindsitselfinanEU-IMFbailoutsituation,withaveryhighDebt/

GDPratioandasevereunemploymentrate.Furtherresearchwillberequiredonthismatterinthefutureinorderf oraconclusiveverdictontheeffectivenessoftheausterityfiscalpolicies.

aneconomy.Theconsequencesofcontractinganeconomycanbefeltbyall.Thisis evidentinthe largenumbers ofboth nationalsandnon-

nationalshavingtoleaveIrishshoresinsearchofemploymentelsewhere(Figure1.1)andthedrasticincreaseinthe unemploymentfigures,whichn o w sitsat14.7%

(Figure2.1).These implicationswill havefurthereconomicconsequencesin thelongterm

However,t h e f o c u s o f t h i s researchi s t o e x a m i n e t h e e c o n o m i c a s p e c t s

o f fiscalconsolidationandtoassessaviablealternativetoausterityinanIrishcontext.Thisresearchw i l l alsotoalesserextentconsidertheimportanceofthesocio-

politicaleffectsonIrishsocietyasaresultof theintroduction of austeritypolicies

Source: CSO Table 1.1

IrelandEmigration/Migration2010 -2012

Previousresearchhasbeenconductedontheeconomicimplicationsofausterityonaneconomy;however,thereisalackofresearchinthecaseofIrelandandthelimitationsofac o u n t r y bound bythe e c o n o m i c p o l i c y restraintso f beinga memberoft h e Eurozone.T h e argumentt h

a t a u s t e r i t y i s a wasteo f t i m e anddamaginghasgatheredgroundi n recenttimes.Recentdevelopmentsi n t h e a u s t e r i t y d e b a t e haveheightenedt h e needf o r am o r e rigorousanalysisofitseffects.AnexampleofthesedevelopmentsisRogoffandReinhart’s(2010)nowinfamouspaperonthechancesofaneconomygrowingwhenexperiencinghighdebttoGDPlevelswhichwasrecentlydebunked(Herndon,AshandPollin,2013).Thisgavep l e n t y ofammunitiontotheanti-

austerityactiviststohighlightthedeficienciesofausterityandt o questionthebasisonwhichmanygovernmentsbasedtheirausterityprogrammes.Althought h e 2007/2008crisisisthemainreasonfortheneedoffiscalausterity,itisnottheauthor’sintentiont o researcht h e c r i s i s , givent h a t t h i s t o

p i c hasb e e n coveredexhaustively.Iti s intendedbytheauthortounderstandwhatausterityis,whyisitneeded,wasitIreland’sonly

choiceto balancetheirfiscalaccounts,itsimplicationsandisthereaviablealternative?Todot h i s , thewriterwillconductsecondaryresearchontheoryandopinionregarding theimplementationofausterity andits economicmeasuresandconductinterviewsto ascertainh o

Theaimofthisresearchistomovebeyondthepoliticalandagendabaseddebateona u s t e

r i t y andtounderstandthefiscalreasoningbehinditsimplementationbyt h e andtoresearchwhetherthereisaviablealternativetoausterity.Toachieve

Irishgovernment-this,t h e researchwillconsultexistingpublicationsandpapersonthematter,aswellasinterviewinge

x p e r t s inrelationtoausterityandIreland.Tofulfilltheresearchbrief,thetopicsexamined(guidedbyresearchquestions) in thispaperare;

 Tounderstandwhat ismeantbyausterity;

 Toevaluatehow theeconomicalelementsof austeritywork inrecessionarytimes;

 ToexaminewhetheritispossibleforIrelandtoadjusttheirfiscalconsolidationpolicies;

 ToevaluatewhetherIrelandcouldreplicatetheIcelandicrecoverymodel

Itistheintentionofthewritertobeabletoanswerthesequestionsafterconductingbotht h e primaryandsecondaryresearchwhichwill bedetailedinlaterchapters.

1.3 –ApproachtotheResearch

Theuseofprimaryandsecondaryresearchwillbeused.Secondaryresearch,throughanalysisofe x i s t i n g a r t i c l e s , p a p e r s anda c a d e m i c p u b l i c a t i o n s , w i l l

b e usedt o gainanunderstanding o f themaintopics.Thisknowledgewillhelpguidetheresearcherwhenconductingt h e p r i m a r y researcht h r o u g h qualitativein-

depthi n t e r v i e w s T h e k n o w l e d g e gainedfrom thisresearchwill thenbeincorporatedintosettingthequestions

fortheinterviewcandidateswhichw i l l int u r n b e c o m e t h e author’sp r i m a r y research.Interviewsw i l l beemployedtogainanunderstandingofausterity,howfiscalconsolidationisbeingusedbytheIrishgovernmentandwhetherthereisaviablealternativetotheausteritymeasurestherein.T h e authorwillthencorrelateboth secondaryandprimaryresearchin theconclusion

1.4 -RationalefortheResearch

Therationaleforthisresearchisthatthetopicofausterityisnotmerelyofacademicinterest;itdirectlyaffectsalmosteveryindividualinIreland,notonlyeconomicallybutalsosocially

TheIrishgovernment,whosedecisionsarediminishingpeople’sdisposableincomethroughincreasedtaxation measuresw h i l e reinvestinglessintothe economy through

expenditure,havemadeclaimsthatausterityistheanswer;however,thereareargumentstosuggestotherwise.Itisatopicthereforethatprofessionals, academicsandthepublicwouldbeinterestedin.

Saundersetal

(2009)te ll usadissertationsubjectmust be ofgenuineinterestandw i t h i n t h e capabilitiesoft

h e researcher.T h e researcheri s a financegraduateandw o r k s p r o f e s s i o n a l l y i n t h e

b a n k i n g i n d u s t r y whichillustratest h e i r c o m p e t e n c e s f o r t h e chosenresearchtopic.ThewriterworksinCentralBankingwhichhasgiventhemagenuineinteresti n tacklingthiseconomicallybasedconundrum

TherecipientsofthisresearchwillbeDublinBusinessSchoolandaimedtowardsthebusinessandeconomicscommunities,professionals,academicsandstudentsalike.ThisresearchwillshedlightonIreland’sfiscaldecisionmakingprocesssinceenteringintotheEU-IMFbailout.Itisanup-to-datetopicsowouldalsobeusefultoprofessionalssuchasbankersandeconomists.Consideringt h a t t

h e s e a u s t e r i t y policiesemployedbythe governmenta r e affectingeveryfamilyinIreland,thisresearchwouldbewelcomedinthepublicdomain.TheresultsmayalsobeusefultounionsorgroupsopposedtoorsupportiveofIrishfiscalpolicies.T h e decisionmakers ofIrishfiscalpolicieswillalsofindtheresultsof thisresearchuseful

1.5 -OrganisationoftheDissertation

Thischapter(Chapter1)willgivethereaderanunderstandingandbackgroundtowhatt h e rese archerisendeavoringtoachievewithasynopsisofthepaper.Thesucceedingchapter(Chapter2)wil

lbebasedonanalysisofexistingresearchinarticlesandacademicpaper.This

willassisti n equippingt h e authorw i t h a criticalv i e w o f currenttheoriesando p i n i o n s

12

associatedt o austerity,fiscalconsolidation,f i s c a l multiplier,Iceland’se c o n o m i c r e c o v e r y

m o d e l ando t h e r relatedtopics.Theseareaso f economicsarechosenb a s e d o n t h e m o s tdominantandreoccurringargumentsdiscoveredwhileresearchingtheliterature.Thefollowingchapter(

1.6 -ResearchLimitationsandScope

Amajorlimitationtothisresearchisthattheprimaryresearchmethodologyofqualita-t i v e inAmajorlimitationtothisresearchisthattheprimaryresearchmethodologyofqualita-terviewscanbedeemedsubjecAmajorlimitationtothisresearchisthattheprimaryresearchmethodologyofqualita-tivedaAmajorlimitationtothisresearchisthattheprimaryresearchmethodologyofqualita-ta.DueAmajorlimitationtothisresearchisthattheprimaryresearchmethodologyofqualita-toAmajorlimitationtothisresearchisthattheprimaryresearchmethodologyofqualita-thenaAmajorlimitationtothisresearchisthattheprimaryresearchmethodologyofqualita-tureofAmajorlimitationtothisresearchisthattheprimaryresearchmethodologyofqualita-theresearch,experAmajorlimitationtothisresearchisthattheprimaryresearchmethodologyofqualita-tviewsarenec

willassisti n equippingt h e authorw i t h a criticalv i e w o f currenttheoriesando p i n i o n s

13essaryinthecontextoftheIrisheconomy,thereforetherewerealimitednumberof appropriatecandidatestointerview.However,theauthordidattempttonegateagendabased

ofintervieweesmayhaveproducedamorebalancedview,butduetotimeandresourceman-

acles,alimitednumberhadtosuffice.Duetothepart-timenatureofthisresearch,timecon-straintsareverylimiting.Theprocessofconductinginterviewsisverytimeconsuminggivent h a t itconsistsofarranginginterviews,conducting,transcribingandcodingthem.Also,adher-

i n g togoodethicalresearchpracticemeansconfidentialityandconsentformsmustbewrittenu p

i f n e c e s s a r y andauthorization must beobtainedinorderto usetheviewsof thecandidates

Chapter 2 - Literature Review

2.1 -Introduction

TheIrishe c o n o m y hasbeeni n aneconomicc ri si s f o r 5 yearsw i t h r e c o r d highsi n unemployment(14.7%in2012),evencomparedtootherEUnations

(Seefigure2.1.)However,ifwecompareIrelandtotheotherEurozonecountriesofPortugal,Italy,Ireland,GreeceandSpain,

(PIIGS)whohavealsoencounteredsevererecessionaryimplications,weseethatIrelandhaslowerunemployment(14.7%)thanallbutItalyin2012(Figure2.2).Therehasbeenmuchnewjargonassociatedwiththefinancialcrisis

Manytermsarelooselythrownaroundthroughmediaandsocialconversationsuchasbailouts,bondholders,Troika,p r o m i s s o r y notest o namebutafew.However,theterm‘Austerity’istheonethatgetspeople’sattention.Askanybodyonthestreetwhatismeantbyausterityandtheywillsaythingslikel e s s cashintheirpockets,lessjobs,domesticcutbacks,mortgagestrugglesandsoon.Theyg e n e r a l l y knowitasatermofnegativity.ThisisafiscalpolicyusedbytheIrishgovernmenti n a n attemptto aiditseconomic recoverybywayofcuttingexpenditureandincreasingtaxes.T h i s isahottopicatthemomentwithrarelyadaypassingthatthereisnotareferencetoitinnationalnewspapersandothermedia

Usedincorrectmeasures,austeritycanbesuccessful(Batinietal,2012);howevertherei s muchliteraturethatsuggeststhatausteritycanbecounterproductive(Pollin,2010).Thereareevenopini