Ireland’s experience, similar to the Danish experience in 1983-89, clearly shows how policies geared to fiscal consolidation do not necessarily entail contractionary effects on real aggregate demand and economic activity. On the contrary, in these two countries, in spite of the tightening policies undertaken, the rate of growth showed a significant increase in relation to previous years.
In particular, in these countries, significant budget consolidation based on spending reduction enhanced the long term fiscal sustainability and increased the policy credibility of a more favourable tax regime.