The Irish and their ‘austerity death spiral’

‘Austerity death spiral’ sounds like some sort of New Goth band. And it certainly is rather dark. But there is now some hard tangible evidence that the cuts agenda is impacting upon growth in a neighbouring country.

The Irish economy relapsed today, having grown in the first quarter. It would take another quarter of contraction to fulfil the unofficial definition of the dreaded ‘double dip’, but today’s figure is concerning. Between April and June, around the time of the Greek debt crisis, Ireland’s economy shrank by 1.2% – the growth in the first quarter was also downgraded.

What is especially concerning is that Irish exports did well, yet this positive was more than outweighed by a significant decline in consumer spending and an epic fall in capital investment. The private sector has not stepped in to replace public sector.

Survey data has been more positive for this quarter, so the Celtic tiger might be purring again rather than roaring in the current third quarter. International credit ratings agencies have also questioned just how much the cost of Ireland’s epic bank bailout was underestimated by the government. And yes the same ratings agencies who warned of downgrades to Ireland’s sovereign debt because of the deficit, also say that further downgrades may occur because of the cuts as well.

There can be no doubt that deficit reduction in Ireland was needed. What today’s figure shows that balancing growth and cuts is almost impossible to get right. The deficit has not actually been reduced by Ireland’s savage cuts (for which it was lauded), as the growth relapse is dragged down tax revenues. This would be the start of the aforementioned death spiral. In the mid 1990’s Japan tried to half a deficit through spending cuts and a VAT raise and ended up doubling the deficit instead.

Ed Balls, the ‘cuts Cassandra’ fired off an immediate email saying today’s figures are a ‘stark warning’ to the Coalition.

The question for George Osborne is whether a similar negative GDP number might cause him to reconsider the pace of deficit reduction. He would point to the positive verdict of Moody’s earlier this week on Britain’s safe AAA rating.

But the debate about whether the austerity medicine causes more pain than the original ailment has been reignited by these figures from across the Irish sea.