Financial crisis and the path of retrenchment and reform in the Irish welfare state

Paper contributed to ESPAnet Annual conference, Edinburgh, 6-8 September, 2012.

First draft

Dr Fiona Dukelow, School of Applied Social Studies, University College, Cork, Ireland.f.dukelow@ucc.ie

Abstract This paper considers the trajectory of retrenchment and reform in the Irish welfare state following the financial crisis from an ideational institutionalist perspective. Conditions for significant re-thinking of Ireland’s political economy by way of a third order paradigm change (Hall, 1993), where the dominant paradigm is substantially challenged and changed, arose when Ireland’s economy became severely destabilised by the financial crisis. This instability quickly mutated into a fiscal crisis for the welfare state as tax revenues went into serious decline while state expenditure rose due to the manner in which the banking crisis was dealt with and owing to rising demand for social services. Rapidly turning to austerity policies, the Irish case is particularly notable for how welfare retrenchment was successfully pursued prior to the spread of austerity measures across the Eurozone and for which Ireland became a reference point in the transnational diffusion of these ideas. Interpreting paradigm shift is difficult and easier to identify and explain after change has occurred (Hill, 2011); Irish economic conditions remain unsettled and alternative ideas challenging the prevailing orthodoxies about the necessity and effectiveness of austerity although currently weak are not absent. Notwithstanding these considerations, this paper looks at how Ireland’s austerity measures have reinforced rather than re-configured the dominant neo-liberal ideas guiding economic and social policy. Specifically, the paper examines the discursive response of key policy actors to the crisis and the related ideas underpinning consequent policy changes to the taxation and social protection regime. Key political speeches and policy documents are analysed with reference to ideational path dependency and Schmidt’s (2011) concept of policy actors’ ‘background ideational abilities’ and ‘foreground discursive abilities’. These concepts are deployed to understand the significance of policy actors’ continued faith in the Irish model of a globalised, competitive economy for how the construction of policy problems and solutions have involved considerable effort to limit tax increases whilst emphasising the need to retrench and reform social protection to ensure its close compatibility with the needs of a globalised neo-liberal economic paradigm.

Introduction

The global financial crisis and its aftershocks pose a serious ‘stress test’ (Hemerijck, 2012:34) for welfare states. Writing in mid-2012 it is clear that the test is far from over, especially for the Irish one. This paper offers something of a mid-term report on the impact of the crisis on the Irish welfare state. Its core focus is Ireland’s rapid and pervasive turn to austerity. It considers the politics of this response from the perspective of paradigm shifts, and the role ideas, interests and institutions play in the changes to the Irish welfare state resulting from the crisis. This opening section briefly contextualises the Irish response by considering the broader international debates and responses to the crisis.

Regardless of the diversity of explanations for how economic and social policy change actually occurs, during the early phases of the crisis there seemed to be a general expectation that change would occur. Peter Hall (Hall 2008 in Hill, 2011:31), for example, saw the crisis as ‘bringing an end to the infatuation with market competition that gripped Europe and America in the wake of the economic crisis of the 1970s’ whilst Joseph Stiglitz (2011:1) remarked that he ‘hoped that, somehow, the financial crisis would teach Americans (and others) a lesson about the need for greater equality, stronger regulation, and a better balance between the market and government’. To many it seemed that the magnitude and intensity of the crisis would pose a major challenge to the status quo and lead to the demise of the globalised neo-liberal model of capitalism. Momentarily, it appeared that these expectations of crisis-induced change were being confirmed by ‘an emergency reconversion’ (Hemerijck, 2012:55) to Keynesian policy ideas and instruments. This seemed evident in actions taken by many governments, represented not only by moves to support their banking systems, but also in modest to substantial counter-cyclical fiscal and social policy measures taken early in the crisis (Armingeon, forthcoming). However, this political window in which Keynesianism regained some legitimacy, and the balance between states and markets seemed to shift, was short-lived. The ascendancy of austerity politics and policy marked the ‘strange non-death’ (Crouch, 2011) of the tenacious neo-liberal paradigm, as the locus of the crisis, particularly in the Eurozone, was shifted from the problems of financialised capitalism to the fiscal problems of (some) welfare states. What began as a crisis for the neo-liberal growth model has become as much a crisis for alternative paradigms, as rival ideas from Keynesianism to the more recent social investment perspective (Morel et al., 2012) appear to have failed to win the battle of ideas and gain political support. However, while the neo-liberal paradigm is not dead neither is it convincingly ‘alive’ in terms of resolving the economic and consequent social problems in countries implementing austerity programmes. The persistent political and economic uncertainty suggests

that the question of which economic and social policy paradigm will emerge post-crisis remains open.

Ireland has been a model case for many of these debates. It is a source of support for rival paradigms. On the Keynesian side it confirms the ‘fantasy of austerity’ by its continued poor economic performance (Krugman, 2012). For neo-liberalists minor signs of economic improvement are taken to indicate expansionary fiscal contraction, a phenomenon based on the belief that public spending cuts encourage private expenditure and capital investment (Adam Smith Institute, 2011). Ireland’s initial problems were symptomatic of the crisis-prone tendencies of the neo-liberal economic growth model and the excesses of unregulated financial markets. Its property asset bubble was also facilitated by the structure of the EMU and the macro-economic imbalances across the Eurozone (McDonnell and Clancy, 2011), which meant that interest rates were inappropriately low for the Irish economy and cheap credit was plentiful. In its early reaction to unfolding banking problems Ireland adopted a highly interventionist response by unilaterally moving to put in place a near blanket guarantee of Irish banking debt. The scope of this response did not extend to other areas of economic or social policy, and Ireland stood out as an ‘early adopter’ of austerity when a financial crisis mutated into a serious fiscal one as well. While fiscal stimulus was still the common mode of response across the Eurozone until early 2010, Ireland’s austerity programme was already well advanced. When a loan was agreed with the EU/IMF in late 2010 the transition was clearly not the case of a recalcitrant state unwilling or unable to impose austerity, the conditions attached represented a continuation of many steps already taken.

Against this backdrop, this paper explores this Irish response and how its financial pressures have led to its retreat to a more sharply defined neo-liberal economic and social policy paradigm. An ideational political economy approach (Cox, 2001; Clift, 2012) is adopted to examine how the economic crisis is ultimately political in terms of how economic imperatives to reform are diagnosed, framed and responded to. Drawing on literature on policy paradigms, discursive and historical institutionalism, the paper looks at the construction and contestation of austerity from the early stages of the crisis, and how the austerity imperative has set out a path for retrenching and reforming the welfare state. It focuses in particular on changing ideas regarding taxation and social protection and their role in shifts within the dominant policy paradigm. The paper outlines a theoretical framework, before briefly reviewing influences and stages in the Irish welfare state prior to the crisis. This analysis provides a point of comparison and contrast to the discursive evolution

of the crisis and to the ensuing policy responses in taxation and social protection, which are subsequently discussed.

Policy paradigm change, ideas and powerHall’s (1993) account of policy paradigms and how they change provides a useful starting point for understanding the Irish economic and social policy paradigm and its changes during the economic crisis. In particular, though Hall’s essay is perhaps more widely known for outlining wholesale paradigm shifts, it alerts us also to the quality of shifts within a dominant paradigm. Hall defines a policy paradigm as an ‘a framework of ideas and standards that specifies not only the goals of policy and the kind of instruments that can be used to attain them, but also the very nature of the problems they are meant to be addressing’ (ibid.: 279). He delineates between three orders of paradigm change in the policy making process, and the variables or components of policy involved at each level. The latter include: policy settings, such as the rate at which a benefit is paid; policy instruments, such as a particular kind of benefit; and overarching goals, such as poverty alleviation. First order paradigm change is typically associated with altering policy settings, whilst second order paradigm change involves altering policy instruments. Even if a great degree of change takes place at both these levels, the paradigm will not break if the types of change ‘preserve the broad continuities usually found in patterns of policy’ (ibid.). In contrast, third order policy paradigm shift entails ‘simultaneous changes in all three components of policy: the instrument settings, the instruments themselves, and the hierarchy of goals behind policy’ (ibid.), thus breaking the hegemony of the existing paradigm.

Though located within historical institutionalism (Steinmo, 2008), Hall’s examination of the role of ideas in paradigm shifts also connects with the broader ideational turn in institutionalist accounts of politics and policy making. By acknowledging the ‘causal influence’ (Schmidt, 2008:308) of ideas in the policy making process, ideational approaches extend institutional theory by considering the ‘path-shaping power of ideas’ (Cox, 2001:471) and tend to be seen as a fourth strand in addition to rational, historical and sociological institutionalisms (Schmidt, 2010). However, rather than viewing the various strands of institutional theory as mutually exclusive, considering connections and complementarities can provide a richer account of the complexity of institutions and of how ‘causal factors of one paradigm interact or are nested with those of another’ (Campbell and Pedersen, 2001:3). Combining the insights of historical and ideational institutionalism, in particular, helps to balance the institutions-as-constraint view of historical institutionalism expressed

in its key concept of path dependency with the more dynamic orientation of discursive institutionalism. Béland (2009:703), for example, draws attention to how historical institutionalism, because of its focus on how institutions structure action, ‘says relatively little about agenda-setting and the construction of the problems and issues policy actors seeks to address’. Focusing on the ideational processes at work shows how ideas are ‘simultaneously constraining structures and enabling constructs’ (Schmidt, 2011: 48) and how they enable both ideational path dependency and path departure. In addition, the focus on ideas overcomes the historical institutionalist tendency to identify change in radical terms, or in radical times, only when an outside shock upsets the coherence of institutional rules. Looking at change in this way might make us attuned only to third order paradigm change and expect it to come only from outside the paradigm. Focusing on the processes of ideational change at first and second order level allows a more nuanced understanding both of change and of how shocks such as economic crises are dealt with in an adaptive way within a paradigm without necessarily triggering third order change.

Schmidt’s discursive institutionalism offers a methodological toolbox for understanding patterns of continuity and change at different levels of a paradigm and the ways in which policy actors engaging with a crisis preserve the dominant paradigm in times of uncertainty and instability. Discursive institutionalism is ‘concerned with the substantive content of ideas and the interactive processes of discourse and policy argumentation in institutional context’ (Schmidt, 2012:2). The relationship between institutions and ideas, and their manifestation through discourse, is conveyed by Schmidt’s development of the notion of political actors’ ‘background ideational abilities’ and ‘foreground discursive abilities’. Background ideational abilities train our focus more on the institutional component of discursive institutionalism, and their nature helps to answer the question of ‘how are institutions created and how do they persist?’ (ibid.:9). They refer to the abilities ‘that encompass human capacities, dispositions, and know-how related to how the world works and how to cope with it …[which] underpin agents’ ability to make sense in a given meaning context’ (Schmidt, 2011:55). Though they are ‘background’ they are not invisible; in a similar reference to background assumptions, Campbell (1998:384) describes ‘principles of faith’ which ‘can be visible to actors yet taken for granted in the … sense that they remain largely accepted and unquestioned’ in debate. Foreground discursive abilities are the more reflexive elements of discourse that help to answer questions of why institutions change or continue (Schmidt, 2012). They are actors’ abilities ‘to think and argue outside the institutions in which they continue to

act, to talk about such institutions in a critical way, to communicate and deliberate about them, to persuade themselves as well as others to change their minds about their institutions, and then to take action to change them, individually or collectively’ (ibid.:8). Focus on foreground ideational abilities at work in discursive interaction can bring insight into how phases of critical thinking from within or in response to rival paradigms can stretch a paradigm at first and second level while keeping overall goals intact.

Though not all ideational approaches belong to a constructivist paradigm, such approaches, as they have developed, tend to be more socially constructivist than Hall’s approach. Hall utilised Heclo’s (1974) study of social policy making as a matter of ‘puzzling’ and ‘powering’, and though arguing against ‘a rigid distinction between power-based and ideas-based models of politics’ (Hall, 1993:289) he emphasised the dynamics of puzzle-based paradigm change. Working with a Kuhnian understanding of paradigm change, he placed significance in events that present as anomalies within the existing paradigm, which thereby becomes less consistent with reality. This may eventually lead to a loss of the paradigm’s credibility and ‘a shift in the locus of authority over policy’ (ibid. :291), empowering a rival paradigm. More recent ideational approaches put greater emphasis on the social construction of economic and social policy problems, and the ways in which policy change is driven not so much by puzzling over anomalies as by powering over how problems are constructed and how imperatives to change are framed (Cox, 2001; Béland, 2005). Therefore, the success or otherwise of policy paradigms is not a matter of their degree of correspondence with economic and social realities but how they manage to co-constitute what is real and what needs, in turn, to be reformed. This combination of ‘powering’ with ‘constructing’ is important. A discursive institutionalist perspective may slip, as Schmidt (2011:60) notes, into ‘too much constructivism’, where power is conferred on ideas in their own right without due attention to structural constraints, and in particular to the connections between ideas, interests and power. This turns our attention to the politics of policy ideas and paradigm change, and specifically to the relationship between power and ideas (Béland, 2005), and entails an approach that is situated between Hall’s more ‘rationalistic’ (ibid.:6) view of policy change and an overly constructivist account. Therefore, just as much as paying attention to discursive interaction is an exercise in observing how actors are trying to wield power through the ideas they use, it is equally important to attend to the relative positions of, and inequalities between, actors in terms of their ability to wield power. Here historical institutionalism can complement discursive institutionalism by emphasising how the design of existing institutions impacts on the power and position of various

actors. Existing institutional rules and norms can therefore shape unequal power relations, and empower or weaken the ideas and arguments of various groups of actors depending on how close they are to the dominant paradigm.

Against this theoretical overview, the following section offers a brief outline of Irish welfare state and core institutional and ideational influences that have shaped its path of development. Particular attention is given to policy trends during the 1990s and 2000s in order to contextualise the subsequent analysis of the impact of the crisis and the rise of austerity.

Economic and social policy paradigms in Irish welfare state development Ireland related unevenly to the post-World War II period of welfare expansion

inspired by a Keynesian paradigm. In the 1950s Irish economic policy underwent a significant paradigm shift. The spur for this was the weak economic progress Ireland had achieved under a period of autarkic development. A policy document entitled Economic Development (1958) marked a new phase in which the Irish state and economy was re-conceived as a small state in a global world, dependent on external wealth and economic participation for its own prosperity. This turning point forms a core component of the background ideational conditions shaping state actors’ understanding of the Irish economy. The state removed protectionist obstacles to open economic participation and committed to attracting foreign direct investment to the Irish market with a range of fiscal instruments, including tax exemption for export profits and very generous capital grants. This stance, in which the state intervenes in the market and creates institutional settings conducive to international trade and investment, has had an enduring policy legacy.

This economic policy departure did not extend to developing the welfare state to the same degree. The dominant belief, expressed in the phrase a ‘rising tide lifts all boats’ (Lemass, in Dáil Éireann, 1964), was that economic growth would solve what were considered the most pressing problems, namely unemployment and comparatively poor living standards. The Keynesian view that the welfare state would benefit the economy (Morel et al, 2012) was not part of political thinking at the time. A later brief ‘social democratic turn’ (Bew et al., 1989) saw some improvements to the welfare state but these comprised a relatively fragmented set of reforms. Unlike the previous departure in economic policy Irish social policy development did not have the benefit of a significant plan or policy architect whose vision shifted the goals of the welfare state from poverty alleviation and relatively modest redistribution to something more egalitarian.

The international rise of the neo-liberal paradigm in the late 1970s also produced a somewhat divergent variant in the Irish context. The 1980s were a time of deep economic crisis for Ireland, yet the fact that social protection rates were not cut during this crisis is seen as a departure from its liberal regime (Ó Cinnéide and Ryan, 2004). The turn to a more corporatist style of governing, or social partnership, in the late 1980s is considered another point of departure. It enabled agreement around modest pay increases in return for taxation reductions so as to provide a non-conflictual route out of the crisis. Major economic growth followed in the 1990s as this form of ‘competitive corporatism’ (Rhodes, 2001) coincided with a number of other positive trends including the creation of the single market, at which point Ireland became an attractive investment site for non-European companies looking to trade in the EU.

By the mid 1990s Ireland’s prosperity became a frequently cited exemplar in the globalist literature. The growth of interest in economic globalisation became synonymous with what Hay (2007:62) observes as the progressive normalisation of neo-liberal economic assumptions in the political economy of Anglophone countries, at the centre of which are ‘stylised open economy macroeconomic assumptions of the business school hyperglobalisation thesis’. Within Ireland these assumptions were evident, for example, in how the imperative of competitiveness, particularly cost competitiveness, became more frequently articulated in political and policy discourse (Dukelow, 2005) and added a new layer to the background ideational conditions formed during the 1950s and 1960s. Greater policy emphasis was also placed on tax competition, light touch regulation and managerialism in the public sector (Ó Riain, 2010). Yet competitiveness was not negatively perceived but considered a core underpinning of the Irish economic model and part of a ‘winning formula’ for growth (Smith, 2010).

Unprecedented high growth rates meant that the state did not suffer from lack of revenue, and low unemployment rates meant that its most pressing problem in historical terms had abated. In these conditions, an apparent expansionary course in social protection was embarked upon, facilitated by the pragmatic populist nature of the Irish political system (Murphy, 2012) but never contradicting the overall perception of economic policy and its goal of maintaining a competitive low-tax economic model. Real spending did grow but declined as a proportion of the more rapidly growing GDP, preserving Ireland’s low-spend model in terms of its overall welfare effort and maintaining the pattern of below average expenditure within the EU (Ireland’s social protection spending averaged 18.6% of GDP over the 2000s as compared to the EU17 average of 27.6%). Social protection changes conformed to a

model of drift (Streeck and Thelen, 2005) as they did not keep in step with the changed economic environment. Social protection rates were improved, new programmes were added, and commitments were made to reduce poverty, but the overall goals of the welfare state, based on poverty alleviation with modest redistribution, were upheld (McCashin and O’Shea, 2007). In this respect Ireland’s comparatively high reliance on means-tested benefits remained. In 2008 Ireland had the highest level of means-tested social protection benefits as a proportion of total benefits at 25.2% compared to an EU average of 11.1% (Eurostat, 2011). More broadly, private provision of services was encouraged through cash benefits for child care and substantial tax reliefs for pension, health and housing costs. For most of this period, therefore, poverty rates remained above the EU average, reflecting the fact that while social protection rates grew they remained low relative to average incomes and overall levels of inequality also remained high in comparative terms.

The improvements in social protection did not place extra demands on the taxation system. Potential distributional conflicts were not encountered as revenues from the booming economy, particularly from transactional taxes, covered expenditure increases whilst simultaneously allowing successive governments to reduce income, capital gains, and corporate taxes, and to enhance tax expenditures. Pay Related Social Insurance (PRSI) contribution rates were also reduced. Ireland therefore maintained one of the lowest levels of revenue from tax and social contributions in the EU over the 2000s (31.3% of GDP compared to the EU17 average of 41%).

These trends led to diverging perspectives on Ireland’s future development amongst the social partners. Employer organisations articulated hyper-globalist concerns that policy trends risked a loss of competitiveness, while civil society actors argued that Ireland’s social development lagged behind economic development and that a Nordic model of welfare was both desirable and achievable (Begg, 2008; Kirby and Murphy, 2008). Between these two perspectives, the closest effort at paradigm shift during this period was represented by the publication of The Developmental Welfare State (DWS) by the National Economic and Social Council (NESC, 2005), a government advisory body on economic and social development. This offered a comprehensive appraisal of the welfare state and an attempt to re-direct its focus in tandem with Ireland’s economic transformation. Inspired by the growing idea of a social investment perspective at European level, it argued that the goals of the Irish welfare state needed to be ‘recast’ and become ‘developmental’. Contrary to the hyper-globalist view, it pointed out that the experience of other small European economies did not concur with the need to maintain a low expenditure regime in

order to compete. It acknowledged that social expenditure remained below international norms, but also argued that recent increases did not produce expected improvements in welfare outcomes. It sought to develop a consensus around the contribution of social policy to growth and competitiveness, and proposed a relatively generous activist model following the example of higher-spending small states who successfully engaged with economic globalisation. Following its publication it failed to frame debate about the future of Ireland’s welfare state, and crucially, the idea of alternative models of successful engagement with economic globalisation remained marginal.

Framing the economic crisis – the influence of the existing paradigm During the early stages of the crisis as economic growth faltered and the gap between revenue and expenditure grew, the existing economic policy paradigm served to make sense of the economic instability, and the instability prompted a renewed faith in the model’s core principles. The crisis was therefore interpreted as an external threat with which Ireland was well placed to cope:

…we have a low level of public debt; our markets are flexible allowing us to respond quickly to difficulties; we have a dynamic and well-educated labour force; and the tax burden on workers and businesses is low. Not many countries anywhere in the world are facing the present global economic difficulties from such an enviable position (Lenihan, 2008a).

By December 2008 a new economic policy, Building Ireland’s Smart Economy: A Framework for Sustainable Economic Renewal (Government of Ireland, 2008) echoed these convictions. It was concerned with how to put the Irish economy in ‘pole position’ (ibid.:32) once the international downturn had passed. This meant applying its existing ‘successful formula’ to secure Ireland’s position as ‘a positive fiscal environment and a pro-business culture which secures it as a destination of choice for FDI and as a magnet for innovators and entrepreneurs’ (ibid.:38).

By 2009 it became increasingly evident that Ireland’s economic problems were more severe than anticipated, and largely not the product of external financial instability but domestic imbalances and mismanagement of a booming economy. The growing speed of the housing crash generated analyses which pointed to the role domestic policy choices played in creating the crisis. These included the part played by pro-cyclical fiscal policy in overheating the economy, and the fiscal vulnerability of relying heavily on construction and consumption-related taxes. As the scale of the

banking crisis became apparent following the property crash, the ‘light touch’ regulation stance also became the focus of criticism. These ideas were crystallised in a series of banking reports that indicated the ‘home grown’ nature of the Irish banking crisis (Regling and Watson, 2010; Honohan, 2010). This critique grew to include the consequences of how the government handled the banking crisis, notably its banking guarantee. The cost to the state of the banking crisis significantly increased the sovereign debt (adding 26 percentage points of GDP between 2007 and 2011 compared to a Euro area average of 1.2 (Weymes, 2012)) and ultimately led to the EU/IMF loan. Notably however, much of the criticism of domestic policy actors and institutions by economists and economic commentators, who had become prominent opinion makers by this point, did not extend to a questioning of Ireland’s overall economic model; greater focus was placed on the incompetence of state actors and institutions than on market failures.

Faith in Ireland’s economic model also remained the cornerstone of government reaction to the criticism that its policies were responsible for the bulk of the crisis. At this point political actors’ foreground discursive abilities came into use in their efforts to defend Ireland’s economic model and adapt to such criticism. Policy decisions and economic trends over the early 2000s were presented as veering away from the fundamentals of the model. The crisis was framed around three core problems: excessive growth in public expenditure, loss of competitiveness, and loss of international reputation. Regarding the former, the Taoiseach suggested for example that:

As a society, we became over-optimistic about our recent, seemingly spectacular, economic success, and badly overshot the mark. People became impatient with restraint. …The general attitude was that we could afford to ramp up spending, while simultaneously being a low tax country, as if there were few hard choices to be made (Cowen, 2010a).

Loss of cost competitiveness, in particular labour costs, was also presented as damaging the model. Though involving ‘hard choices’, diagnosis of both these problems was consistent with the goals of the existing economic paradigm; they did not require a fundamental re-think of the soundness of the model, but represented policy mistakes made by not adhering to it closely enough.

As the banking crisis grew, the concept of Ireland’s international reputation was added to the crisis lexicon. The problem of a reputational crisis was articulated to convey the damage the banks had done to Ireland’s image as a stable,

competitive place to come and do business. Preserving financial market and investor confidence in the Irish economic model became a core part of the justification for saving the banking system by whatever means necessary. It also served as an ex post rationale for the banking guarantee, decided without prior debate in September 2008, and as a defence of its cost implications.

The response of economic actors, including employer organisations, displayed a great deal of similarity with the ideas of the political elite and their cognitive style of argumentation. The same faith in, and need for, renewal of the economic model was evident from the early days of the crisis: ‘Ireland must recreate its attractiveness for foreign investment. As a tiny trading nation this is the only way to survive’ (McCoy, 2008). In diagnosing causes, similar emphasis was placed on the fiscal crisis being driven by public expenditure trends: ‘the unsustainable growth in current expenditure between 2001 and 2007 is a central cause of the current fiscal crisis’ (IBEC, 2010:14). The credibility and impact of these ideas was enhanced by the fact that the constraints of globalisation were a shared frame of reference with government, the main difference being the degree of emphasis employed. The hyper-globalist perspective was readily represented in the media, with business leaders exhorting government to aim for more than being merely competitive:

The great trading nations of the future will not be competitive, they will be super competitive. We need to take Ireland’s national competitiveness to a completely new level (Murphy, 2009).

Business leader commentary on the problems of the financial system, albeit rare, closely mirrored mainstream political arguments and concepts. The idea that the banking crisis was ‘manageable’ and that the banking guarantee was the right thing to do to was evident in approval of state support for the banks:

Despite the huge public resources required, definitively addressing the banking crisis was always going to be necessary, though painful. The wider economy will remain in the doldrums without a vibrant, competitive banking sector that is able to provide an adequate flow of credit to businesses and customer. Bank recapitalization is a necessary step towards that end (McCoy, 2010).

Contrasting with the shared interpretive framework of government and economic actors, trade union leaders made the case for a major paradigm shift and employed both normative and cognitive arguments. The idea of the injustices and inequality

caused by a ‘redundant economic model’ (Sweeney, 2009) was fused with the idea that the crisis also proved the flawed logic of the neo-liberal model of globalisation. The latter point was made by arguing that the financial crisis revealed that ‘privatised, deregulated and ultra-free markets’ did not work and by highlighting the contradictions of the model in the way that the ‘“state” so reviled by the neoliberals … has come to their rescue’ (ibid.). A paradigm shift involving a ‘fundamental realignment of our economy and society’ (ibid.) was called for. The policy goals outlined therefore went against the grain of the dominant discourse, arguing that the way the crisis should be handled should not aim for a return to the past, but a transition to a more sustainable socially cohesive model of development. In reacting to the plan for the Smart Economy, the Irish Congress of Trade Unions (ICTU) for example argued that:

… an agreement geared towards a relatively short period of recession followed by a bounce back to the high growth rates of recent years is not what is required. …some kind of Social Solidarity Pact is required in which the burden of adjustment is carried by the people most able to carry it. It should be capable of being a bridge to a future that is more sustainable than the model upon which we relied for the last thirty years (ICTU, 2009a:7 emphasis in the original).

Challenging the dominant model also entailed questioning of the detail of the problems identified by the dominant discourse. In rebutting the idea that the fiscal crisis was caused by excessive expenditure, the taxation side of the equation was highlighted as the cause of the problem with the public finances. Unions also argued wage costs were not responsible for the loss in competitiveness, pointing out that comparative data on wages showed that while wages had risen they remained comparatively low and that cost of living increases and the appreciation of the Euro against sterling were responsible for the bulk of the loss. However, the claim that ‘commentators demanding a [wage] cut should base their assertions on analysis and get their facts right’ (ibid.:33) held little sway in subsequent policy responses.

Constructing and contesting austerityThe dominant framing of the causes of the crisis and the underlying defence of Ireland’s economic model followed through in how the austerity response was proposed and defended. While some manoeuvrability was initially acknowledged,

austerity was quickly proposed as both the more convincing choice and the only option:

While the strength of the economy in the past decade has given us some room for manoeuvre, we cannot put our reputation for fiscal responsibility in jeopardy…. A soft option of ignoring the budgetary challenge …would have grave consequences for the future of this country. The soft option would risk all the economic and social advances we have secured in recent years (Lenihan, 2008b).

We must continue on a path of bringing spending into line with resources. There is no option (ibid.).

Dismissing the ‘soft options’, taxation and borrowing were ruled out as the Minister for Finance frequently argued that ‘we cannot tax our way out’ (Lenihan, 2009a) and ‘borrowing more is not the answer’ (ibid.). Over time justifications for retrenchment also became tied to constraints imposed by rising borrowing costs on sovereign debt markets as they reacted to what appeared to be the intertwined risk of national and banking insolvency. Ultimately retrenchment was tied to the underlying principle of ‘sound public finances’ (Government of Ireland, 2010: 20) which was outlined as the ‘clearest and most direct responsibility’ (ibid.) of government in its relationship with the economy.

Such reasoning for austerity did not essentially differ amongst economic commentators and business leaders who promoted similar orthodoxies as to why austerity was necessary, why it had to be ‘frontloaded’, why it had to be deepened to respond to the worsening crisis, and why expenditure cuts were preferable to tax increases. The main difference between the business leader position and the government lay in the composition of the austerity response with the latter initially making the case for no increases in taxation, to gradually ceding the point that taxes could be raised by broadening the tax base. Different views were also evident in relation to balance of the mix between taxation and expenditure cuts, with a preference expressed for more of the latter. Similar arguments to the government position were deployed, namely that tax increases damaged the economy.

Against this wave of debate on the necessity of austerity with contest largely circumscribed by questions of composition, scale and speed, trade union leaders and other civil society actors argued for a radically different set of policy instruments involving fiscal stimulus (TASC, 2010; ICTU, 2009a,b,c). Opposing the idea of ‘no

alternative’, ICTU (2009a:39), for example, argued that Ireland’s low debt status during the early stages of the crisis meant that further borrowing to stimulate the economy was not the ‘insurmountable problem’ others claimed. As financial markets turned against Ireland, sovereign wealth funds, including the National Pension Reserve Fund were identified as alternative investment sources. The economic growth and tax revenues generated by a stimulus were seen as means of addressing the debt and this argument was made in tandem with proposing that the Stability and Growth Pact (SGP) target of a 3% deficit ceiling by 2013 be extended to 2017. The rightness of a Keynesian strategy was contrasted with the ‘nonsensical’ neo-liberal response of trying to address debt by deflating the economy. In terms of solidarity, austerity was not opposed outright but challenged on the basis of who bore its burden. Acknowledging the crisis in the public finances ICTU argued that ‘workers did not create the problem, but will contribute to resolving it - as long as the wealthy also contribute’ (ibid. :9-10).

The limited impact of these ideas in the policy course followed was not unrelated to the disintegration of the social partnership process. Attempts at negotiations to maintain social partnership, which seemed to acknowledge union ideas, diverged significantly from the actual budgetary decisions taken by government during 2009. The groundwork for a new partnership agreement in the form of a Framework for a pact for stabilization, social solidarity and economic renewal (Department of the Taoiseach, 2009) was agreed in January and represented the influence of ICTU in shaping a more balanced response to the crisis. It outlined a commitment to ‘an equitable approach’ to responding to the crisis ‘in which all sectors of society contribute in accordance with their ability to do so, and conversely the most vulnerable, low paid, unemployed and social welfare recipients are insulated against the worst effects of recession’ (ibid.:3). It also committed the government to a form of ‘fiscal stimulus’ by maintaining its capital expenditure plans at a high level and a ‘flexicurity approach’ to those who became unemployed. In February the government introduced a Financial Emergency Measures in Public Interest Act which saw public sector pay reduced by a new pension levy. To ICTU the pension levy and subsequent retrenchment measures implemented in a supplementary budget in April went against the grain of the social solidarity approach tentatively agreed. Continued participation in social partnership, if it meant agreeing to retrenchment measures, placed it in a difficult position (Roche, 2011). Further attempts at negotiating a recovery plan fell through in December when agreement could not be reached on how public sector cuts would be pursued in Budget 2010. This budget imposed cuts to public sector pay bringing total reductions

including the pension levy to 15% on average. At this point IBEC formally withdrew from social partnership with the decision not to adhere to the private sector pay agreement in place. Limited political support for social partnership at this stage demonstrated the weakness of the union side unable to bring its paradigm to power and at a deeper level reflected the limited embedding of the approach in a polity also wedded to global neo-liberalist ideas (McDonough and Dundon, 2010). The breakdown of social partnership combined with the congruence between the government’s budgetary decisions and advocates of austerity further shifted the power balance in favour of their position.

Evidence disconfirming the claims made for an austerity approach including the absence of a return to growth, rising interest rates for sovereign debt and a government deficit that was not shrinking was not so much the source of puzzlement as proof that austerity efforts were not deep enough. Thus a €4bn adjustment in Budget 2010 when it was claimed that it was ‘the last big push’ (Lenihan 2009a), was followed by a €6bn adjustment in Budget 2011 which was the first budget post the IMF/EU loan. The Fianna Fáil/Green government, in power since the crisis began, suffered enormous losses in the General Election held in Spring 2011. However its replacement with a Fine Gael/Labour coalition did not necessarily indicate a different approach. With a near majority, Fine Gael gained the largest number of seats in its history. In opposition it was highly critical of the role Fianna Fáil played in creating the crisis but did not adopt an anti-austerity position. Its Programme for Government with Labour contained a commitment to re-negotiate the banking part of the deal with the EU/IMF, and it also bore the influence of Labour in its references to equality and solidarity. Overall however the programme affirmed the government’s support of the objectives of the EU/IMF Programme of Support including fiscal consolidation and structural reforms. By the time of the IMF’s review visit in April 2011 it reported that the new government had taken ‘full ownership of the goals and key elements’ (IMF, 2011a) of the programme.

Austerity and taxation policy The policy goal of maintaining a competitive low-tax regime has had

significant influence on how changes to the taxation system have been pursued and justified. Tax revenues declined by about 30% between 2007 and 2009 and despite expressions of reluctance to raise taxes, austerity measures have been composed of approximately one third tax increases and two thirds expenditure cuts. Increasing tax revenue by changing rates and rules to existing taxes and introducing new taxes essentially represent first and second order adaptations to Ireland’s low tax model.

Changes have been made which increase income, capital, inheritance, and consumption taxes as well as social insurance contributions. Some tax expenditures have been restricted, and a water charge and a property tax are due for introduction in 2013. The corporate tax rate has remained unchanged and tax based supply side measures to encourage investment, enterprise and job creation have reduced the tax burden for some investors and employers.

A guiding principle has been to broaden the tax base in order to restore sustainability to the tax system and to keep marginal tax rates low across the board (Commission on Taxation, 2009). While there has been broad agreement with the concept of broadening the base, questions have been raised with respect to how the burden has been shared between high and low income earners, and between labour and the corporate sector. Initial tax increases fell heavily on income tax, not by increasing existing rates but by introducing a new type of income tax in the form of an income levy. Both this and existing health levies were replaced with a single ‘universal social charge’ (USC) in the 2010 Budget. The USC has brought a substantial group of low-earners into the tax net with an exemption level initially set at €4,004 but raised to €10,036 in the 2012 Budget and with rates starting at 2% and rising to 7% for income over €16,016. The tax net was also widened by reducing income tax bands and credits by 10% in the 2011 Budget.

Such changes were justified by applying the general concept of broadening the tax base to broadening the income tax base. Budgetary decisions made over the 2000s to lessen the burden of income tax on low income earners were recast as creating an unsustainable situation. Arguments that this placed a disproportionate burden of the tax changes on lower earners and counter proposals to introduce a new higher tax rate for higher earners were rejected. In keeping with the imperative of competitiveness, the idea of the global mobility of high earning workers placed limits on how much the income tax base could be broadened at the top:

All of the available evidence suggests that high marginal tax rates will discourage high-skilled workers from remaining in Ireland, as well as discouraging high-skilled workers from locating here in the first place. It is not good policy (Cowen, 2009).

Advocates of progressive tax reform drew attention the inequities of a vast range of tax expenditures that benefited the wealthy and the relatively low rates on capital taxes. The impact of these ideas has ‘stretched’ the paradigm somewhat and tempered the belief about disincentivising higher earners with the need to ensure

that they ‘shoulder a commensurate burden’ (Lenihan, 2008b) of the adjustment. Rates on capital gains, inheritance and savings taxes were increased to 30% from various lower levels, and the value of pension reliefs and other tax expenditures was restricted for high income individuals. The overall costs of tax expenditures however remain ‘a little-explored policy wilderness’ (Collins and Walsh, 2011: 6).

Efforts to suggest that Ireland’s low corporate tax rate actually undermined the broader competitiveness and stability of the Irish economy (ICTU, 2009a; Community Platform 2011) gained little attention. The vital significance of retaining the low corporate tax rate has remained a ‘principle of faith’ (Campbell, 1998):

‘Our Corporation Tax rate of 12½ per cent has become an international ‘brand’, known the world over. It is a powerful expression of our pro-enterprise ethos and continues to attract new business and new jobs to this country. In a time of great uncertainty for international business, it is important that we send out a clear message. The 12½ per cent Corporation Tax rate will not change. It is here to stay’ (Lenihan, 2009a).

Proposals made to introduce a temporary levy on corporate tax payers received little public exposure, while business arguments about the need to increase ‘tax offerings’ to incentivise investment and maintain Ireland’s competitiveness were reflected in decisions taken to introduce new corporate tax expenditures. These include an increase in tax credits for research and development expenditure from 20% to 25%, a 3 year tax exemption for start-up companies and tax relief for the acquisition of intangible assets. A similar pattern is evident in how changes to PRSI were pursued. The employee contribution ceiling has been removed. While this is a progressive measure it contrasted with no increase to employer contributions. Exemptions and reductions were also introduced for employers recruiting individuals unemployed for over six months and for jobs that pay less than €365 a week respectively.

On the whole therefore civil society actors’ efforts to make the case for a paradigm shift in tax policy so that it would eventually conform with European norms with respect to tax revenue and welfare expenditure have had little political impact. Government projections for 2015, the point at which the deficit is predicted to fall below the 3% SGP ceiling, indicate total tax revenue of 36% of GDP which would remain below the EU average (40% in 2010). Almost 15% of revenue collected is to pay interest on gross government debt which is projected to peak at 120.3% of GDP by 2013 (Department of Finance, 2012). Future economic growth rates are also unlikely to return to the levels achieved during the bubble period or the even higher

ones of the 1990s. In this high debt low growth future, these trends raise questions about the range and quality of services that can be provided on a low tax model. Quasi-taxation, where the state requires ‘individuals to fund their own provision’ (Glennerster, 2010:695) may supplement the low tax model as indicated by plans to introduce a quasi-mandatory pension supplementary to the state pension, mandatory universal heath care insurance, and some form of increased charge for third level education. The introduction of such quasi taxes, as Glennerster notes risks reducing people’s willingness to pay ‘real’ taxes, potentially further undermining the redistributive and solidaristic functions of the tax system.

Austerity and social protection policyTaxation changes essentially represent efforts to preserve the existing low tax model as part of Ireland’s successful economic policy formula and involve no policy goal change. By contrast, growth in public expenditure is believed to be one of the policy mistakes of veering from that formula and, as part of that growth pattern, social protection has been the object of deeper re-thinking in order to align its principles and goals more closely to Ireland’s economic model. Generosity and disincentive effects have been two central framing ideas in a retrenchment agenda involving rate cuts and other curtailments, and a more far-reaching reform agenda based on creating a more individualised activation based system aligned more closely to the needs of a competitive economy.

The idea that the social protection system was generous was initially indirectly introduced by justifying retrenchment as a way to ‘safeguard the generous system we have’ (Lenihan, 2009a). By the 2011 Budget connections between retrenchment and generosity were more clearly tied to the idea the state could no longer afford comparatively high rates of social protection. The most comprehensive rate cuts (cumulative average 10%) occurred over these two budgets, with all payments with the exception of those for older people being affected. Social insurance based entitlements were also curtailed. In 2009 the qualifying criteria of several social insurance benefits for new claimants were substantially modified. The number of contributions required doubled to 104. The maximum claiming period for Jobseekers Benefit was reduced (from 15 to 12 months, and 12 to 9 months depending on contributions paid). Perceptions about the generosity of the system also led to a questioning of the value of universalism and a belief that the system needed greater targeting: ‘universal entitlements irrespective of means do not target those in greatest need. I believe in some cases there is a need to differentiate between those who have and those who have not’ (Lenihan, 2008b). However plans

to target Child Benefit, the main universal payment, by means testing or taxing the payment were stymied by technical difficulties and potential costs. Sharper targeting has instead occurred by reducing the value of the payment (16% cut based on two children), reducing the upper age limit and compensating poorer families by increasing the value of means-tested child and family payments.

Arguments that refuted the idea of the generosity, which made comparisons with rates across the EU, not just the UK, and with the risk of poverty rate (EAPN Ireland, 2009, 2011) made little headway. In public discourse political reference to generosity generated enormous media debate and economic commentary about the cost of the social protection, sidelining the social purposes of the system and its role with respect to poverty. In this climate campaigns such as The Poor Can’t Pay had little success in opposing welfare retrenchment.

Ideas about generosity segued to ideas about the disincentive effects of social protection and contributed to an individualized, voluntarist narrative about unemployment and the unemployment rate which rose from 4.5% in 2007 to a current rate of 14.8%. Disincentive concerns in political discourse and policy discussion focused on the idea that replacement rates are too high and that the system is overly passive and has not kept pace with activation developments elsewhere (Department of Finance, 2009; Department of Social Protection, 2010). Initial measures focused on reductions and sanctions. Several were introduced in the 2010 Budget when the Minister for Finance drew attention to the traps created by ‘a welfare system out of step with labour costs in the rest of the economy’ (Lenihan, 2009a). Rate cuts were applied Job Seekers Allowance and Supplementary Welfare Allowance claimants (51% for those aged 18 to 21, 30% for those aged 22 to 24) to incentivise them to ‘stay close to the labour market’, while all others who refused employment or activation would have their rate also reduced by 30%. The One Parent Family Payment is also being reformed for similar reasons, with the upper age limit of the youngest child being reduced to age seven on a phased basis and a stricter means test being applied.

More far reaching reform was signaled by a report which examined the feasibility of introducing a single social assistance payment for people of working age and looked at how it would facilitate a transition from welfare to employment (Department of Social Protection, 2010). It proposed a single payment with different levels of conditionality and support depending on distance of the claimant from the labour market. Payment levels were modeled on Jobseekers Allowance rates and rules which would represent a rate cut for other types of claimants. Although the influence of the DWS was acknowledged the report was more directly influenced by

the UK system and its recent reform to a more personalised conditionality approach. The necessity of activation based reforms have been reinforced by the EU/IMF Memorandum of Understanding which tied activation measures to budgetary savings and to structural reform of the labour market in order to enhance economic competitiveness. An up-date in 2011 specified that ‘a comprehensive programme of reforms that can better target social support to those on lower incomes, and ensure that work pays for welfare recipients’ be introduced (IMF, 2011b:75). The new government also committed to ‘maintain welfare rates’ and in that context more structural reforms are being considered in order to achieve further savings in social protection expenditure (Department of Social Protection, 2011). As part of a set of reforms outlined in Pathways to Work (Government of Ireland, 2012) steps have been taken to establish a National Employment and Entitlements Service. Also influenced by UK developments this envisages major re-organisation of the delivery of social protection services in order to integrate them with employment supports through an individualised case management approach which imposes activation obligations in return for social protection. The introduction of a single working age assistance payment is also envisaged as part of the reforms.

There is broad based agreement amongst policy actors and advocacy groups that a more activation based system is desirable (Joint Committee on Jobs, Social Protection and Education, 2012). However, the guiding principle of ensuring ‘work pays’ has ambiguous meaning and can involve emphasis on ‘carrots’ or ‘sticks’ (Kuhner, 2012). In this regard calls by advocacy groups for investment in supports such as child care, recognition of part-time as well as full-time work, and the need to acknowledge the current lack of jobs as a structural problem contrast with the thrust of the dominant discourse and policy changes. Reforms are at an early stage but are indicative of a more individualized coercive orientation, notwithstanding the fact that any ambitions to provide comprehensive supports are also constrained by the on-going retrenchment agenda. In addition the determination to maintain a low-tax competitive regime is not readily compatible with an activation regime underpinned by high quality supports and services.

Concluding remarks

This paper has attempted to analyse the impact of the financial crisis on the Irish welfare state by examining the response in terms of policy paradigms. Using Hall’s outline of types of paradigm change, combined with a historical and discursive institutionalist analysis of key points in the development of the Irish welfare state and subsequent reaction to the financial crisis, the paper considered the strong turn to

austerity as a response that derives from the interpretive framework of the dominant economic and social policy paradigm. Analysis of the ideas that framed the diagnosis of the crisis and the policy response demonstrated the powering of dominant political actors and business interests in contrast to the weaker position of advocates of an alternative paradigm. Analysis of subsequent changes to taxation demonstrated efforts to maintain the policy goal of a low-tax regime with first and second order policy changes consistent with that overall objective. First and second order policy change to the social protection system is also evident. However the part attributed to the growth in social protection expenditure in the diagnosis of the causes of the crisis has also generated attempt at a deeper restoration of the policy goals of the social protection system to the needs of Ireland’s economic model. In sum therefore although uncertainty still persists within Ireland and the Eurozone and the aftershocks of the financial crisis have not yet settled, to date Ireland’s response to the challenge of the crisis indicates a retreat to a more sharply defined neo-liberal policy paradigm.

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