Hungary and Ireland, EU Members' Parallels and Progress

1
Hungary and Ireland, EU Members.Parallels and
Progress

• Alan Dukes
• Director General
• Institute of European Affairs
• Dublin, Ireland
• Budapest, 3 May, 2007

2
Before the Celtic Tigerthe horror story, 1980

• Current Budget Deficit - 6 of GNP
• Exchequer Balance - 13.4 of GNP
• National Debt over 100 of GNP
• Unemployment 11
• Continuing net emigration
• Adjustment need accurately analysed by new Prime
  Minister December 1979 but no action taken until
  after he loses office in June 1981
• New Government begins fiscal adjustment
  programme, July 1981

3
The adjustment startsand falters

• New Government introduces stringent fiscal
  measures expenditure cuts, recruitment ban in
  Civil Service, etc.
• January 1982 Budget defeated because of unpopular
  tax increase (which could have been avoided if
  Governments internal communications systems had
  functioned properly)
• Nobody is happy 3 General Elections in 18 months
  (June 1981, February 1982, November 1982)
• Adjustment put on hold for most of 1982
• Government defeated in October 1982 when it
  presents economic plan based on manipulated data

4
Adjustment resumesthings get worse before they
get better

• Total employment continued to fall until 1990
• Unemployment increased until 1988, fell until
  1990, increased until 1993 and fell again until
  2000
• Net emigration, a feature of every Census since
  1926 (exc. 1979) continued

5
Adjustment begins to work

• Inflation fell from 20.4 in 1981 to 3.1 in 1987
• Inflation continued to fall until 1999
• External trade balance improved from 16.5 of
  GNP in 1981 to overall balance in 1984 to 36.5
  in 2002
• Positive net exports contribute to growth until
  2004 negative net exports retard growth from
  2005 on

6
Irish adjustment was a lengthy process

• Current Budget Deficit remained between 6 and 8
  of GNP from 1980 to 1987
• Exchequer Deficit 15.7 of GNP in 1981, 3.2 in
  1987 public investment slashed i.e more pain!
• National Debt went from 100 of GNP to 150
• For most of the 1980s, total revenue from income
  tax was absorbed by debt servicing yet more pain
  (especially for the Minister for Finance)!
• After all that, the Government lost the 1987
  election!

7
Common sense breaks out and adjustment is
reinforced

• New Government (1987-89) continues adjustment
  programme, despite having opposed it while in
  Opposition
• Social Partnership process instituted in 1987
• Changes in both corporate and personal tax
  systems
• Civil Service reform

8
Fruits of adjustment, dangers of complacency

• Total employment has increased steadily since
  1990
• Unemployment 15 in 1989, 4 today
• Inflation lt 4 through the 1990s, 2.5 in 2005,
  today highest in EU
• Current trade balance 7.8 GNP in1990, 23.9
  in 2005, negative net exports now slowing growth
• Current Budget Balance -6 GNP 1990, 3.9 in
  2003
• Exchequer Balance -1.9 GNP 1990, 1.4 in 2004
• National Debt 87.7 GDP 1990, 30.4 in 2005

9
EU influence on adjustment

• EU membership has been a strongly positive
  influence
• Agricultural support payments and capital inflows
  from Regional, Structural and Cohesion Funds
• EU accountability and quality rules contributed
  to success of public capital investment
  programmes
• Point of attraction for FDI
• Single Market programme
• Liberalisation proves its worth ( e.g. air
  transport, telecoms, insurance) but still some
  problems (e.g. electricity)
• Irish emphasis on HR proved to be constructive

10
Can the Irish experience be replicated

• There is no substitute for fiscal common sense
• In a fiscal mess, there are only two options
• - either a short, sharp, painful
  adjustment, or
• - a long drawn-out, slightly less
  painful one
• FDI is not a sell-out of sovereignty
• Economic and fiscal adjustment never reach an
  end-point there is always a need for further
  adjustment
• Complacency can quickly erode the success of an
  adjustment programme