The main causes of the Domestic recession in 2008
Political decision and political ambitions was the main cause of the domestic recession in 2008 .The politicians bought the countries votes with the peoples future wages .That is they allowed the banks to flood the country with cheap credit while also lowering the tax rate increasing the supply of money at the same time , all this money was borrowed. The income tax rates were reduced supplemented by revenue from house building, for every 10,000 houses that were built the government collected one billion in revenue however what people didn’t see was that this increase in revenue was borrowed by young people on the strength of their overvalued future wages. This problem didn’t start in 2008 or even 2001 what we can clearly see by trade figures is that problems were beginning in the export led Celtic tiger pre 2001 resulting in the decline in export growth in 2001.Ireland had introduced the euro in 2002 and it was commonly blamed for all types of inflation. From 2000 to 2005 our prices raised twice the rate of the EU and wages rose more than twice as fast as a result. Many believe that the EU low interest rates which suited France and Germany were the main cause of Irelands problems however I believe that this is false as the government could have intervened in various ways to combat this problem instead they did the opposite instead of reducing the money supply they actually increased it with increased public spending and massive tax exemptions. Figure 1 illustrates that UK interest rates were similar to the Euro area until late 2007 however they managed their overall money supply by maintaining tax rates which in turn kept control of hosehold spending.
Figure 2
Tax wedge on the average wage of a single Person
Figure 3
Source National competitiveness council Benchmark Report 2010
Figure 3 shows how much tax the average single worker pays on their income, when we compare Ireland to the UK the difference in spending power is clear to see. The average mortgage calculation in 2006 was based on 45% of disposable income this fuelled houses prise raises. The Irish Government dramatically reduced income taxes year on year increasing money supply and fuelling inflation. Figure 4 shows that these reductions are now been reversed.
Figure 4 Source CSO
The Irish Government and them alone caused the Irish recession by allowing inflation to get out of control which caused a loss of competitiness as far back as 2001 .They increased the supply of money by reducing taxes and failed to regulate the banking lending. There was an excess supply of money in Europe however other countries regulated the supply. The UK and the rest of Europe had low interest rates so this problem can be isolated to Ireland. The rise in unemployment and inflation were the result of bad economic decisions which also caused a loss in competitiveness and a drop in GDP figures. What is causing so much pain to the Irish people at present is a return to reality. We are lowering costs increasing taxes and reducing private sector credit.
