Failed by Fianna

The Irish government rejected fiscal stimulus and slashed public spending instead. The result is eco

Celtic Tiger to Celtic Tories would seem an apt way of summing up the story of Ireland in recent times. From poster child of free-market globalisation everywhere from Hungary to Honduras, the UK's nearest neighbour is now enforcing the most savage cuts in public-sector pay, child benefits and social welfare payments of any EU government. Such is the level of misery being endured by the increasingly bewildered citizens of this little republic that even Brian Lenihan, the man principally responsible for inflicting it, has publicly acknowledged that fellow Europeans are "amazed at our capacity to take pain". The finance minister added, slightly boastfully: "In France there would be riots if you tried to do this."

Lenihan's last budget, delivered shortly before Christmas, was so draconian that the Daily Telegraph took to hailing him as a role model for the British Chancellor. Inevitably, this led to him being branded "Iron Brian" back home, though he will doubtless be spared Margaret Thatcher-style demonisation as he has since been diagnosed with pancreatic cancer.

Instead, the nickname will probably now be pinned on the premier, Brian Cowen, who has responded to the current crisis pretty much as David Cameron and George Osborne advocate. Alone among the leaders of advanced industrial nations, Ireland's two Iron Brians rejected the Keynesian case for a fiscal stimulus to keep the economy moving and set about inflicting a scale of pain from which even the new Tories might flinch momentarily.

Since the onset of the credit crunch in mid-2008, Dublin has delivered three slash-and-burn budgets estimated to have sucked about 5 per cent out of the nation's GDP. Exacerbating rather than alleviating the rapid meltdown in its private sector, such retrenchment could contribute to an astonishing 15 per cent shrinkage in the Irish economy overall - the sharpest contraction experienced by any advanced industrial nation in peacetime.

The British economist David Blanchflower warned that Ireland could be plunged into a 1930s-style depression if the public purse is cut: "Balancing the budget is not what you do in a recession. My advice is to wait until you're out." His warning was widely reported in the Irish press but totally ignored by government.

The unemployment rate now stands at 12.5 per cent and the number drawing the dole (including part-timers) has risen to well over 400,000, in a population of 4.5 million. It could easily hit the half-million mark before this slump is over and would be much higher if Ireland's more mobile citizens, along with many recent immigrants, weren't heading out of the country in search of work. Mass emigration is once again providing a safety valve for social unrest, as it has done throughout Irish history.

Spooked

Lenihan sought to offer some hope in his last budget by declaring that "the worst is over", although there would appear to be a stronger case for suggesting that the austerity has only just begun. The cuts announced in December aim to reduce state spending by €4bn this year, but the overall plan is to slash it by €15bn within four years. As total expenditure by the Dublin exchequer was just under €60bn last year, this means that the Irish state is set to shrink by a full quarter in less than half a decade.

At least two generations look destined to pay a painful price for the follies of the golden circles whose scams, swindles and con jobs have lumbered Ireland with zombie banks that make RBS and HBOS look relatively vibrant. Anglo Irish alone may swallow over €30bn of public cash, equivalent to the total revenues collected by the Irish exchequer in the whole of last year.

Morgan Kelly, a professor of economics at University College Dublin, forecasts that "mass mortgage defaults caused by unemployment and falling house prices are the next act of the Irish economic tragedy. As well as bankrupting our worthless banks all over again," he says, "the human cost of tens of thousands of families losing their homes will be enormous but, because the government has already exhausted the state's resources taking care of developers with Nama [the National Asset Management Agency], there is very little that can be done to help these people."

Meanwhile, the social partnership accords that ensured industrial harmony throughout the past two decades have in effect been ripped up and the public-sector unions are threatening to bring the entire country to a standstill before the winter is out. Even the republic's police force, the Garda Síochána, say they are prepared to go on strike, which could mean Ireland faces the sort of anarchy that Boston experienced in 1919 when its (largely Irish) rank-and-file officers protested against a ban on union membership.

Yet, Dublin's fragile coalition government seems far more spooked by the danger of international investors downgrading their country's credit rating (which would make the cost of borrowing substantially higher) and the spectre of the IMF seizing the financial reins. Dublin is determined to distinguish Ireland from Greece, whose continued profligacy threatens to destabilise the entire eurozone. The 20 per cent cutback in state expenditure that the Irish want to implement within the next four years is intended to comply with an important requirement for membership of the single currency that member states keep their expenditure deficits down to a maximum of 3 per cent of GDP.

The European Central Bank (ECB) agreed to bend this rule when the extent of the global crash became clear, but it has set firm deadlines, between 2012 and 2015, for each state to recomply (Ireland's is 2014). Members of the cabinet have stated repeatedly in recent months that everything they have done to address the country's economic crisis is in accordance with ECB advice. No one in Dublin doubts Ireland would have been in the same mess as Iceland had it not signed up to the single currency, the main reason the Lisbon Treaty was passed by such a huge margin at the second time of asking.

Their continued euro enthusiasm is just one reason why Ireland's current rulers would bristle at the Celtic Tories gibe. When the leader of the Labour Party, Eamon Gilmore, coined that sobriquet, he was perhaps unaware that the term "Tory" originated in Ireland. It derives from the old Gaelic word tóraidhe, meaning outlaw or robber, and was initially a term of abuse for the isolated bands of guerrillas who resisted Cromwell's brutal campaign in the mid-17th century. Since these rebels were allied to royalists, the term became embraced by monarchists on the British mainland, and, in time, by the modern Conservative Party.

As Ireland's self-styled republican party, Fianna Fáil is obviously anything but monarchist. Nor has it become monetarist in an ideological sense; it is too simplistic to say the party is engaged in a zealous crusade to squeeze the country's money supply, re-engineer society according to a social Darwinist blueprint and neuter the trade unions.

Blythe spirit

Yet it is telling that Lenihan was denied the customary standing ovation in the Dáil chamber (parliamentary meeting place) at the conclusion of his last budget speech in the Dáil. Fianna Fáil backbenchers clapped politely and then returned nervously to their constituencies, where they have normally positioned themselves as defenders of social welfare and worked hard to preserve a working-class base.

Lenihan would have taken no delight in becoming the first Dublin finance minister to cut social welfare payments since the foundation of the Irish Free State in 1922. He certainly didn't enjoy being taunted by Róisín Shortall, the Labour Party spokeswoman on social and family affairs, who declared poetically in the Dáil: ''The social conscience of the Fianna Fáil party is dead and gone. It's with Ernest Blythe in the grave." (Blythe was the last Irish politician to engage in such brutalities in the 1920s.)

The Fianna Fáil strategists and stalwarts are smart enough to know that what is one of the most successful electoral forces in western Europe would be finished if it ever invoked the Thatcherite line that "there is no such thing as society". Even when forecasting to the Dublin Chamber of Commerce that living standards would have to fall by over 10 per cent, Cowen was careful to add that "we must stick together as a community".

The political system of independent Ireland has long been tribal, local and clientelist; it is closer to Tammany Hall (the 19th-century Democratic Party machine run by Irish Americans) than Tories versus Labour. What Fianna Fáil can be accused of is crass populism. During the country's prolonged economic boom, the dominant force in Irish politics wanted to remain all things to all Irishmen (and women).

The fat cats certainly got the cream during the Tiger years, but crony capitalism (a capitalist economy that depends on close relationships between government and business) was always combined with a vague republican commitment to equality. In his time as Taoi­seach, Bertie Ahern defended the way his party courted property developers, builders and bankers at some of the nation's social and sporting events. At the peak of the Tiger boom, he said: "If there are not the guys at the Galway races in the tent who are creating wealth, then I can't redistribute it."

The reality was that this "ordinary fella" was presiding over more of a fantasy island than even Brown's Britain. When serious concerns started to be raised about the republic's unsustainable property boom - which accounted for almost a fifth of the Irish exchequer's income before the crash - Ahern responded that "the boom times are getting even boomier". He took no serious steps to lower the state's reckless dependence on property and construction.

The one-time island of saints and scholars had become a land of spivs and speculators and a manufacturing outpost for American multinationals. Ireland's economic miracle was always somewhat hallucinatory, because these US firms, heavily concentrated in chemicals and pharmaceuticals as well as computer software, used it as an Atlantic tax haven and route to the EU marketplace. Ireland Inc was always far richer than the national workforce, three-quarters of whom earned less than €40,000 per annum, even in the good times.

During this period, popularity - and peace with the unions - was bought by slashing income tax and shovelling much of the proceeds of the nation's property boom into a bloated public sector as well as vastly increased social-welfare benefits. When Ahern took office in 1997, the average single person on €40,000 a year paid 40.6 per cent of their annual earnings in tax. By 2004, this had been cut to just 19.7 per cent. His government cultivated rather than cured a widespread phobia towards taxation of any sort. Even when the price of a three-bed semi in Dublin rose to €1m, there was no serious move to introduce a council tax (or any separate source of local government finance).

Compared to many others, the Irish have a remarkably low percentage of their salaries deducted for income tax and social security. Indeed, for quite a prolonged period now, half of the entire national workforce has got away with paying no income tax. Even today, a single person earning €35,000 a year in Ireland is paying 18.7 per cent of their gross income on tax and social security, compared to 39 per cent in Germany, 29 per cent in the US or 23.5 per cent in the UK.

Welfare state

Yet the Irish have been able to fall back on considerably higher welfare benefits than the British. Dole claimants in Dublin and Donegal aren't exactly prosperous, but they are much more comfortably above the breadline than their counterparts in Derry or Doncaster. Until recently, the basic jobseeker's allowance in the republic stood at €200, compared to £60 in the UK. Such is the gap between Irish and British benefits that the Gardaí have had to mount checkpoints to try to stop unemployed people from Northern Ireland sneaking into the south to register a claim.

Lenihan's budget should certainly address the border problem in the case of the youngest claimants, who had their benefits halved in the December budget. But most welfare recipients probably won't be any worse off, as the slight fall in their benefits will be offset by the steep fall in prices that Ireland is now experiencing.

If there is a governing philosophy at work in Dublin these days, it seems to be this: just as the spoils of the Tiger times were spread around, so everyone must now take a share of the pain. The government attempted to put a progressive coating on the public-sector pay cuts by declaring that those earning less than €30,000 would have their pay cut by 5 per cent, compared to a 15 per cent clawback in the case of those with salaries above €200,000.

The big problem for the ruling party is that the catch-all approach that kept it in power throughout the boom has converted into unprecedented unpopularity since the bust. Fianna Fáil has been shaken to its foundations as its populism has become unpopulism. Stuck at below 25 per cent in the polls for more than a year now, its leader has become the most loathed Taoiseach in history. Meanwhile, concern mounts that Dublin's shock therapy risks a deflationary shock that could not just collapse public-service provision, but propel Ireland into a full-blown, Japanese-style depression.

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