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Chapter 1: What led to Ireland's financial crash in 2008?
It's almost 20 years since the financial crash where the country fell into a disastrous recession for the first time since the 1980s. If you cast your mind back 20 years, June of 2006, Ireland looked like one of the strongest economies in Europe until it all fell off a cliff. So we're asking today if we've learned from it or are we at risk of repeating the mistakes of the past?
I'm joined in the studio by the former Tánaiste, Joan Burton, and Dan O'Brien is on the line, Chief Economist at the Institute of International and European Affairs and columnist with The Currency. And you're both very welcome. Joan, I'm going to start with you because I was looking back on what you were saying in 2006.
You were talking then about the credit bubble, about the lack of regulation, about the dependence on income for the state from property transactions. And everybody was saying to you, well, would you not let us get on with it and enjoy the good time that we're having?
Turns out you were correct on all fronts. It was one of those times when one didn't want to be right. I'd have preferred to have been wrong. But unfortunately, the state just got itself into a complete mess. I think the banks got carried away completely. And, you know, when we look back now, we've got out of it thanks to the sacrifice of everybody.
And I think we should just make sure to just keep a little note in our heads that these things can happen in the financial markets.
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Chapter 2: How did the economic landscape change from 2006 to the crash?
We've got out of it, you say. Dan, you say that we have scars that remain and that are still costing people a lot of money.
Well, we do. Good morning, Clare, and good morning, Jo. One of the legacies of it was that We had such a big budgetary crisis, such a hole in our budget that every tax had to go up and nearly everything we spent, the government spent, had to be cut. So we had years of significant austerity then.
But I think it's really strange that the emergency increases in taxes that took place, personal taxes that took place 18 years ago, are still in place for a crisis that is long ago gone. So it's really, you know, the legacy effect is that governments have just left those personal tax rates.
By some estimates, one of the worst tax systems, personal tax systems in the developed world are still there. So that's a really long lasting legacy.
But Daniel, I know you're also worried about our reliance on corporation tax, you know, for day-to-day spending. So is there a risk that if those taxes that you talk about are cut, that the reliance on corporation tax will actually increase?
Well, my fear is that if the corporation taxes fall, that the government is going to come back and take even more personal taxes.
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Chapter 3: What lessons have we learned from the financial crisis?
That's the risk if things go wrong. But where there's a real parallel between the mistakes of pre-2008 and right now is that the government became extremely reliant on a volatile source of tax. Back then, it was related to property transactions. Now, it's related to the taxes paid by big multinational companies, just a handful of them.
Now, if Donald Trump were to demand that the American pharmaceutical industry return to the United States, I think that's unlikely and it would be very difficult, but stranger things have happened, that we would lose out on a lot of the corporation tax that the government has become very dependent on.
It hasn't treated those taxes like a windfall and saved them, say, like Norway does with its big energy industry. So we've become, for day-to-day expenditure, become dependent on a very volatile source of income, just as we did back pre-2008.
Yeah, you could argue, Joan, that it's a bit of a mirror image. It's just the money's coming from a different place.
Yeah, I think what Dan is doing is very much public service, that he's saying to people, hold on, we're doing well, but it's not perfect and things can happen. And I think it's the things can happen, which happened before, and they can happen very quickly.
So I do think it's appropriate to say, look, when we're doing all the reviews for the annual budgets and so on, and everything has gone over with a fine tooth comb. But we need to look at where are the dangers and prepare to ward off those dangers should they arrive.
Hopefully they won't, but it's quite possible because, you know, the financial markets turn over, they change, and we have to deal with that.
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Chapter 4: What are the lasting impacts of austerity measures on Irish citizens?
We have the multinationals here. They've been very, very successful. But, you know, we need to keep looking and seeing how do we... do whatever we're doing at the moment. How do we do that better? How do we do it with more security? The other thing, of course, is that we've big, big challenges in relation to young people, many of whom are now beginning to emigrate again.
And I think that that's something that we need to be careful about. Because of housing, of course. It's all about housing because the cost of housing now has basically gone through the roof. particularly if you were going after any kind of expensive house. And that's very, very difficult for young people.
So quite a lot of young people, they're going to go abroad anyway because they want to travel and so on. That's fine. But we do want most of them to come back.
Chapter 5: How does reliance on corporation tax affect Ireland's economy?
And I think that's something that the government is not paying enough attention to. And the core of that is, how am I going to get a house if I'm going to settle down and have a family?
Yeah.
Can I come back to housing in a moment? Because I just want to return to resilience on one income source. So looking back to 2006, as we've said, it was property. Now you could argue it is corporation tax. But is the country not in a much more resilient place now, Joan?
I mean, we have all of our funding. We've learned a lot of lessons and we have a lot of checks and balances in the system. And that's absolutely critically important. But it also is important that we pay attention to those checks and balances, that we don't just say now everything is fine now and the rainy day will never happen. You just don't know in terms of world economics.
So Dan when it comes to housing that is the big problem that we have now as Joan has said there. How much of a hold do you think it has on Ireland's progress from this point on?
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Chapter 6: What challenges do young people face in today's housing market?
Yeah, it certainly, it is a major issue. I'd caution against sort of a view that we're exceptional. You know, a lot of young people are going to Australia now. They don't have cheap houses in Australia. Canada, same thing. I was in Canada a couple of years ago and the debate around housing was exactly the same as it is here in terms of high rents and high costs and lack of availability.
So, you know, it's not just our problem. It's most of the sort of countries that young Irish people who want to go to have exactly the same problems. That's sort of a longer story. But can I just be a bit positive in terms of the lessons learned? I think Irish people, I'm not sure the government has learned to be prudent with their finances, but Irish people have become much more prudent.
So the amount of debt Irish households have now is half of what it was relative to disposable income. So Irish households have learned very well the dangers of getting too much into debt. In 20 years on, that lesson is still learned and people are much more prudent.
And that's a really positive thing because if something goes wrong in the world, and as Joan is absolutely right, like there are so many risks out there in the global economy now that could affect us negatively.
Chapter 7: Have Irish households become more prudent with their finances?
If something goes wrong, at least people aren't in debt. And that household balance sheets, as we call them in the economics profession, are much, much stronger than they were 20 years ago.
Is there a negative to that at all? You know, if you have a population that has been through something like 2008, Dan, and, you know, we were talking about saving earlier and people putting their money into bank accounts where they're not earning very much interest. Have we become too cautious?
You could certainly argue that the banks, and let's be clear, it was the banks who were to blame. They were the main people to blame for what happened then. The government was to blame in the sense that it didn't look after the public finance and didn't prepare for these kind of risks we're talking about. But the main cause of the crash...
There were a lot of people in government who were just shocked because they didn't know much about finance. Traditionally, we've had a lot of politicians in Ireland not necessarily involved in finance as a political item. They've tended to concentrate on spending the money as opposed to how to, you know, get the money and keep it and then use it properly.
I think that's where we possibly just need to get sharper.
I totally agree. And just to finish the point about the banks, the banks went crazy before the crash.
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Chapter 8: What could trigger another financial crisis in Ireland?
And now, if anything, to your point, Claire, they're probably too conservative in the sense that they're very old fashioned and they were so scarred by it. If anything, they don't lend enough to both people who are buying houses and to businesses. That's arguably a case to be made.
Do you agree with that, Joan?
You know, I do think that they need support and we probably actually need to be clearer about who can get what from a bank so that if somebody doesn't have any previous business experience, but they're going into business now, that there's somebody that they can talk to, have a good conversation with and find out what is it they would be able to get and then what is it that they can pay back.
I think we just need to be very honest about it. I think at the time of the last crash, there was really a lot of la-la land where people thought everything must be OK. It just can't go down. It can.
Well, there was enormous trust placed in the banks. You know, if the bank wants to give me a 100% mortgage or in some cases 120%, well, that must be OK for them and for me.
And it wasn't. Well, your bank manager always seemed to wear a lovely navy blue suit of some kind and look great. And the inside of the banks all looked great. But, you know, once the trouble broke out, there weren't that many people there who were in a position to actually salvage the thing. And that's really what happened.
And do you think that Irish households have really learned a lesson when it comes to debt and saving?
Oh, I think there's a large memory in Ireland of what happened and people don't want to see that happening again. You know, again, you're talking about younger people now. They're going to want to do things and take risks and... You know, it's OK for people to take some risks, but they need to be aware that the cost of money can be very high.
And if you want to borrow money, you need to have a pathway to repaying it because one day the banks will call and you have to repay.
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