Measuring Fiscal Stance 2009-2012. Quarterly Economic Commentary, Autumn 2012

Over the period since mid-2008 the Irish government has introduced a series of austerity measures equivalent to approximately 15 per cent of GDP. These measures were taken to try and reverse the deterioration in the government deficit that began in 2008. It is never a straightforward exercise to assess the outcome of such a package of discrete policy changes on the public finances. It is made more difficult in circumstances where the economy is going through a precipitous collapse in output and employment as occurred in Ireland between 2008 and 2011. This collapse caused a dramatic decline in taxation revenues and an increase in unemployment-related expenditures, both of which serve to worsen the public finance position. In such circumstances, it is important to disentangle the effect of policy decisions (e.g. higher tax rates or lower transfer payments) which affect the discretionary fiscal position from those changes which are driven by the collapse in the economy