Politics and Fiscal Policy under Lemass: A Theoretical Appraisal

Lemass rejected Whitaker’s recommendations that direct taxes be reduced and public investment shifted from social to productive areas. This was arguably done for political reasons and because Lemass believed that it might be possible to establish a social partnership deal of the type that Eichengreen has argued to have played a crucial role in post-war European convergence on US living standards. Such a bargain could not be reached under Ireland’s industrial-relations system however. The present paper contrasts the two systems and shows the adverse employment, investment and growth effects that such attempts would have had in Ireland. Introduction Seán Lemass is regarded by many as the finest Taoiseach in the history of the state. All politicians are constrained however by the need to retain the support of the electorate and of a time-varying combination of sectional interests and swing voters. Though Whitaker had argued in Economic Development (1958) for a reduction in direct taxation and a shift in public investment from social to productive areas, and these proposals were endorsed in the First Programme for Economic Expansion (1958), neither was actually implemented by Lemass. The First Programme for Economic Expansion specifically proposed reducing capital spending on local authority housing and hospitals and implementing significant income tax reductions. It was suggested furthermore, as Leddin and Walsh (2003, page 87) note, that the rate of increase in wages and salaries in Ireland should lag behind that in Britain. The actual outcomes in these areas over Lemass’ tenure as Taoiseach (1959-66) are charted in Table 1. The reductions in capital spending were very short lived; income taxes increased significantly, and Irish nominal wages expanded far more rapidly than in the UK. I am grateful to Niamh Hardiman for drawing my attention to Roche (2009), with which the present paper shares some common themes, and to Jim O’Leary, who unearthed the strike data. The comments of participants at the 2009 Irish Economic Association Annual Conference, where an earlier version of the paper was presented, are gratefully acknowledged. 1 Martin O’Donoghue has suggested to me that Lemass may have seen these documents as too grounded in the traditional orthodoxy of the Department of Finance.