The FT reports on Ireland’s high budget deficit — projected to be 11.9% of GDP this year — and rising borrowing costs. Ireland is the country that “virtuously” took steps to cut government spending much earlier than other crisis-hit nations, and now I fear it is seeing the result. I hope that something similar will not happen here, but I fear it might, as a result of the coalition’s deficit-cutting plans.
Why? Because it is not the absolute size of the deficit that matters, but the deficit relative to GDP. If you cut government spending in a recession, you prolong the recession; GDP is therefore smaller than it would otherwise have been. It is possible for this effect to outweigh reduced government
spending borrowing and result in a higher debt/GDP ratio.