in construction was falling, with knock - on effects throughout the economy. the fiscal position was suddenly deteriorating. while there had been on average a general government surplus for the previous decade, with gross government debt shrinking to below 25 per cent of gdp by 2007, reliance on the boom - time revenue sources that were now evaporating had been so large that a sizable deficit was now emerging, augmented by the increased cost of social protection spending. the deficit was growing both in absolute terms and especially as a percentage of gdp, which was already shrinking alarmingly. total government spending jumped from 39 per cent of gdp in 2007 to 58 per cent two years later as measured at the time. 4 tax revenue fell by 30 per cent in the same period. while the tax and spending movements had the merit of being a strong automatic stabiliser – the general government position moved from balance to a deficit of about 14 per cent of gdp in the same indeed these measured growth rates greatly exaggerated the degree to which sustainable income was being generated, given the future loan losses that were being embedded. in addition to the banks active in lending to domestic borrowers ( and this included half a dozen foreign - controlled entities as well as the six main locally - controlled banks ), almost half of the total assets of the irish banking system on the eve of the crisis related to export - oriented banks located in what had been known as the dublin international financial services centre. these included sizable operations by banks such as depfa / hypo, merrill lynch, state street, and citi. thus, to say that the irish banking system amounted to about 8 times gdp in 2008 is correct, but exaggerates the size relevant to the irish crisis by up to about half. ( depfa did fail in the crisis, as did a small number of other german - owned bank or nearbank entities, but the assets, liabilities and overall business of these entities were essentially all offshore, and their losses were not assumed by the irish government ). furthermore, there was only a modest involvement of irish banks in explicit equity - type risk - sharing with their borrowers, in contrast to the case of iceland, whose banking system imploded within days of the dramatic irish guarantee of september 2008. another contrast in pre - crisis banker behaviour with the situation in iceland is reflected in the fact that, in post crisis ireland, criminal proceedings have to date been taken only in respect of persons in one bank. several other banks, including the two

recapitalisation bill or an even larger cash call on the guarantee became clearer in the third quarter of 2010. with the ecb reluctant to envisage a long - term substitution of central bank funding for the private bank funding that was not now being renewed ( despite the government guarantee5 ) the scene was set for an international rescue, engineered with the imf and a new european lending mechanism. worried that funding costs were moving higher than the cost of borrowing at the imf, the government ’ s borrowing arm ( the national treasury management agency ) withdrew from the market at the end of september 2010, hoping that conditions would improve before its sizable cash balances would run out in the middle of the following year. but the banks were no longer able to fund themselves and did not even have sufficient eligible collateral to refinance at the ecb ’ s normal operations : one - by - one they had to fall back on emergency liquidity assistance from the central bank of ireland, a facility tolerated by the ecb only for the short - term. had the ecb convinced the market that the irish banks would be provided with sufficient liquidity for as long as needed, the government might perhaps have been able to formulate and implement a renewed and deepened budgetary adjustment without the need for recourse the initial guarantee had been for two years and as a result there was a large bunching of maturities in september 2010. the government continued until march 2013 to offer a guarantee on new bank funding. bis central bankers ’ speeches to official financing. absent such statements of support, it was clear that an imf programme could not be avoided and this was negotiated in november 2010. austerity and macroeconomic adjustment the fiscal plan embedded in the eu - imf programme fully recognised the deterioration in economic and fiscal conditions that had occurred since the government ’ s own four year adjustment programme had been launched back in early 2009. the deterioration of conditions at home and abroad meant that further belt - tightening would be needed, though in fact most of the heavy lifting had already been done in 2008 – 10. the new plan envisaged reaching a 3 per cent deficit by 2015. this could have seemed a stretch to a naive observer noting the recorded deficit of 31 per cent in 2010 ( about two thirds of which related to bank recapitalisation ), but in fact it was more than achieved. [ chart : deficit ] unlike the situation with greece, and to a lesser extent other stressed countries making fiscal adjustments at