Taxation, expenditures and the Irish Miracle

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The ESRI organises a public seminar series, inviting researchers from both the ESRI and other institutions to present new research on a variety of public policy issues. The seminar series provides access to specialised knowledge and new research methodologies, with the objective of promoting research excellence and facilitating productive dialogue across the policy and research fields.

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Guest Speaker: Paul Klein, Professor of Macroeconomics, Stockholm University

Seminar Topic

We examine the role of fiscal policy in accounting for the remarkable rise of Ireland from one of Western Europe's poorest countries to one of its richest in just a few years. We focus on the importance of business tax reform and changes in the size of government, in conjunction with other factors, which we model as a residual rise in Total Factor Productivity (TFP). We conduct our analysis using a two-sector, small-open economy model where production requires tangible and intangible capital services, and where inflows of capital are limited by a collateral constraint (disciplined to account for the GNP to GDP gap). We find that the much discussed reductions of business  taxes played a significant, but secondary, role in the Irish miracle. However, tax reform and other changes strongly reinforce each other. We also find that Ireland's openness to capital movements was crucial: under the same driving forces, a closed economy would have experienced a much slower and significantly smaller rise in GDP.

Speaker Bio

Paul Klein is a professor of macroeconomics in the Department of Economics at Stockholm University in Sweden. Previously, he was a faculty member at the University of Western Ontario, the University of Southampton and Simon Fraser University. From 2010 to 2014 he was a co-editor of the Journal of Economic Dynamics and Control. From 2015 to 2017 he was a co-editor of The Scandinavian Journal of Economics.