Is Ireland living beyond its means?

Ireland is one of the most developed countries in the world and has a high tax high government service economic model, it has for the last few decades substantially reduced the socio-economic inequalities in the economy and had a Gini coefficient score of 30.1 in 2000 while The Economist says we have the best quality of life in the world. This has come at a cost though, government deficits are running at over 10% of GDP, public debt accounts for over 40% of all revenue generated in the economy and the Irish population has a debt level, in relation to disposable income, that is the highest in the developed world – our personal debt in 190% more than our disposable income. All this begs the question, are we living within our means or is Ireland’s economic model unsustainable?

Unprecedented growth throughout the 1990s earned the country a reputation as a Celtic Tiger. But now it appears the Tiger’s habitat is changing, prey is becoming scarce and he is losing weight and energy. Ireland is burdened with debt and, like Greece, recently had its credit rating down-graded by Standard and Poor from AAA to AA+. Our economy has contracted between 2008 and 2010 by 17% and unemployment had ballooned to 13%, putting additional strain on government expenses as welfare services are expanded to accommodate the newly unemployed.

While Greece balances precariously on the edge of bankruptcy, countries like Ireland, Spain and Portugal are slipping closer to the edge. The EU has repeatedly called upon at-risk countries in the EU to enact spending cuts to reduce budget deficits that may cripple the European economy and while Ireland has not yet made any significant moves to reduce spending, the Economic and Social Research Institute have, according to reports by Ireland news media, said that the economy will not show any signs of recovery from the recession until 2011, by which point the public debt may be above 80% of GDP.

“Ireland will be one of the countries in focus. We are expecting fiscal consolidation,” warned EU Economics Commissioner Olli Rehn.

In May the government was forced to sell 1.5 billion Euros in bonds and while this raises badly needed revenue now, the government will face a backlash in 2014 and 2020 when the bonds mature.

But, is the severity of the economic outlook merely a sign of the times? Countries the world over have been effected by the recession, there are few national governments without a deficit and Ireland’s government spending is not all that greater than other developed countries. Is the crisis because of the country’s unsustainable living or because of the greatest recession since the Great Depression?

That’s a matter of opinion, but recent events have shown that Pfizer, one of the biggest employers and longest standing foreign companies operating in Ireland, does not believe the current model to be sustainable, even if there weren’t a devastating recession gripping the world.

Paul Duffy, the head of Pfizer’s operations in Ireland told Ireland news media that operations in Ireland had become too costly due to extensive employee benefits, regulations and labour laws and said the cost had gotten “out of whack” and “out of hand” – a possible impediment to recovery from the recession. When Ireland was the land of milk and honey and our economy was expanding rapidly, the cost of doing business here was proportionate to that growth, but a 17% retraction and no prospect of growth until 2011 changes this considerably.

Duffy was speaking in relation to a decision by Pfizer to lay off 785 of its 5000 employees in Ireland. Ireland news media reported the company as saying the decision had nothing to do with the global economy or the financial situation of Ireland, but instead was related to a recent acquisition of another pharmaceutical company that created dual plants and factories, rendering their activities inefficient.

Globally, the company is releasing around 18% of its workforce, which puts the layoffs in Ireland at a level slightly less than what might have been expected. Although the layoffs were unrelated to the economy, Duffy made his statement with regard to Pfizer’s future role in the country, warning that Ireland could not continue to be the most expensive environment in which it operates.

Pfizer may be representative of the feelings felt by many other domestic and international companies. If it is the most expensive operating environment for Pfizer, the same is probably true for other multinationals. The current downturn and ensuing recession will have psychological effects that will last much longer than the financial ones, as the economy picks up again companies will remain conscious of costs and confidence in Ireland will hinge on its ability to adapt to more austere Europe.