Economic Collapse and Crisis

In relation to the economic crisis from 2008 onwards, economist Morgan Kelly posed the question in 2011: ‘What happened to Ireland?’ It was, he said, a natural question’ given “the meteoric trajectory of the Irish economy over the past 25 years from basket case to superstar and back to basket case.” He looked at the long-term factors relevant to the economic boom- including free secondary education and expansion in third level in the 1970s, more competitive costs and currency devaluations. However by 2000, while Irish incomes had risen to average European levels, competitiveness was affected as wages rose faster than increased productivity. Kelly noted that “at this stage it might have been expected that Irish growth rates would fall back to ordinary European levels. Instead, growth continued at the rapid rates of the 1990s with one difference, that it was now driven by a credit-fuelled building boom rather than by competitiveness.”

In the 1990s, 5% of the republic’s national income came from building, the usual level for an industrialised economy, but by 2006 this had reached 15%, with bigger mortgages and rising bank lending. Between 2000 and 2008 banks could borrow almost any amount on international markets without security, at rates only slightly above central bank rates, which led to an international lending boom. Bank lending in most European economies rose to around 100% of national income, but in Ireland, such lending rose from 60% to nearly 200% and most of this was funded by borrowing from overseas banks. According to Morgan Kelly, “Everything that happened in Ireland between 2000 and 2008 stems from this simple fact.”

Of the €1.8 billion of taxes collected in excess of expectation in the first nine months of 2006, €1 billion of this was tax from property transactions. But for all the focus on ‘revenue generated’, there was not enough concern expressed about the borrowing underpinning it: personal debt as a percentage of disposable income increased from 89% to 140% between 1996 and 2006. One of the failures of the era was the determination not to act on the Kenny Report of 1974 on the price of building land; it had recommended that development land should be compulsorily acquired by local authorities at a 25% premium above its existing use value and that a register of property sale prices be established.but its recommendations were essentially ignored, because restrictions on land speculation threatened powerful pressure groups and vested interests. Kenny’s report, a reaction to the housing shortages, land prices and land rezoning practices of the 1960s and early 1970s, was frequently invoked in the decades after its publication; it had highlighted that the demand for housing would continue to grow, and that if nothing was done about it, prices would rise at an even more rapid rate than previously. Quite clearly, successive governments failed to meet the challenges of profiteering.