Absolutely. The key lesson from Ireland's fiscal history in the past five decades or so is to try to avoid the cycle of boom and bust. The Deputy mentioned the 1980s, which were preceded by a very significant expansion of government spending in the late 1970s, in particular following the 1977 general election. That left us exposed and a shock hit with the oil crisis of 1979 that drove Irish and international economies into recession. We simply did not have any capacity to respond. In fact, the response in Ireland when we were in recession was to increase taxes and try to cut spending, which prolongs a recession.
Again, in the run-up to 2008, when things were going well – in that instance it was the private sector that was doing a significant increase in spending via a lot of borrowing from the banks - there was an external shock that left us exposed. The Government was collecting all the tax revenues from stamp duty, income tax from construction workers, VAT on new housing and, by and large, it was spending it as quickly as it was coming in. That left us exposed to an external shock. We had the credit crunch of 2008. Again, Irish and international economies plunged into recession. The response here was to increase taxes and to cut spending, which made the recession worse.
Some instances where we saw the positive use of the public finances was Covid and the cost-of-living crisis, where the Government was able to step in when there were difficulties and increase spending in response to those. What we have learned is to try to avoid the boom-bust cycle, which as the Deputy said, is most pronounced in the construction sector. We went from building 90,000 houses a year in 2006 to approximately 5,000 in 2011. We essentially stopped the construction of housing and, as we are finding out, it is very difficult to ramp it up again.
If we had a smoother approach and avoided the boom-bust cycle, we could probably still end up in the same position we are in now. One example I give is on government spending and the thoughts about rules, nominal amounts and how much of an increase to make. The widest data we have – general government data – go back to 1995. If we look at the nominal increases and what Governments did in terms of spending from 1995 to 2023, on average, it increased by just over 6% a year. On average, we are not doing too badly, but there were periods where it was increasing by 15% or 20% a year, and then there were periods when it was being cut, whereas if we increased by 6% every year we would be in the same position we are in now, but we would have avoided many of the problems that gave us the boom-bust cycle we have seen in recent years.
That is not a problem unique to Ireland, but if there was one lesson we would take it would be to try to avoid that, so that we would have the ability to respond when the crisis hits. We cannot predict what it is. Who would have predicted an oil shock in 1979? Even in the 2008, could a global credit crunch have been predicted? No. However, if an economy is performing well, and if the Government is not running surpluses when that is the case, we leave ourselves exposed. One change we would like to see is that if there is a unilateral shock to Ireland, whether it is corporation tax, foreign investment or something we cannot predict at all, that we do have the capacity to respond, and that unlike previous occasions, we do not make recessions worse.
