Success of Ireland: budget balancing?

[Mason Clark <masonc@xxxxxxxxxxxxx>]

I asked this question on the sci.econ newsgroup: "Why has the Irish
economy become so successful?" and got the following answer. (The
origin I don't know but could find out.)

Question: is this the story, the whole story, and nothing but the story?

quote

On the empirical data front, a study of OECD economies from 1960 to
1994 found that nations that significantly reduced their budget
deficits subsequently generally experienced significantly faster
economic growth rates.

However, this relationship was largely dependent on deficit/debt
reduction resulting from (a) government spending cuts, rather than tax
increases, and (b) the spending cuts being concentrated in government
wages and transfers, rather than public investment.

Fiscal adjustments that relied primarily on tax increases and/or cuts
in public investment tended to be contractionary and/or unsustainable.

This is all consistent with the problem being not deficits per se (or
reducing them through tax increases would be effective) but
government spending levels sustained by deficits being too high.

The paper discusses various countries as case studies. The most
dramatic example of success is Ireland, which has doubled-to-tripled
its growth rate since the 1980s while reducing government receipts by
10% of GDP, reducing government expenditures by more than 33%,
accordingly moving to a budget surplus, and cutting its national debt
in half.

Other countries experiencing success along these lines include
Denmark and New Zealand.

"Fiscal Adjustments in OECD Countries: Composition and Macroeconomic
Effects", by Alberto Alesina and  Roberto Perotti, NBER Working Paper
No. W5730. http://www.nber.org/

A change of 10 or 15 percentage points of GDP in government spending
surely can have a meaningful "crowding out" effect  (or "freeing"
effect, if spending is reduced ) regarding the real resources
available to the private sector. (The reduction has been 18 points in
Ireland).

If the private sector directs real resources more productively than
the government, the result should be seen in national economic
numbers, as it seems here they are.

The only "contraindication" for a different policy analysis would be
if economies generally suffered from a lack of demand that could be
remedied only by direct government spending, not by monetary policy.
But realistically, that does not seem to have been the problem facing
the US and Europe over the last couple of decades.

~~~~unquote