Ireland was hailed during the boom years as a 'Celtic tiger'. But now the government has had to introduce huge cuts to deal with its budget deficit. How is it affecting ordinary people?

When Ann Moore returned to have breakfast with her family after a 12-hour night shift at a nursing home, she found riot police and bailiffs outside her home of 16 years. She and her husband, Christy, and their three children were being evicted. Despite climbing a ladder to the top of the house for six hours in a desperate attempt to thwart the bailiffs, the distressed care worker was eventually coaxed down and taken to hospital. Her home in the southern suburbs of Dublin was promptly boarded up.

The Moores were badly in arrears, owing the council €10,000 (£8,500). For eight months, Ann had been paying back €50 on top of her €100 weekly rent. But in a country where 300,000 homes lie empty, the authorities decided to make the Moores homeless and punish them for their perceived fecklessness. Yet it is the politicians, bankers and developers of Ireland who have been rather more feckless.

Ireland is, per capita, the most indebted country in the EU. Its budget deficit of 14.3% is higher even than in Greece. For a decade, the "Celtic tiger" economy was the poster child of free-market globalisation. Now, this bedraggled alley cat of an economy is neo-liberalism's favourite example of how to cut your way to recovery. Ireland's government has slashed public-sector spending by 7.5% of gross domestic product with a series of drastic cuts this year: public sector pay by 15%, child benefit by 10%, unemployment benefit by 4.1%. Another €3bn will be removed next year, a total of 10% of GDP over three years: these measures are equivalent to the British government slashing its budget not by the £6.25bn planned by George Osborne in 2010, but by an incomprehensibly gigantic £150bn.

Yet despite the cuts, dubbed "masochistic" by the Financial Times, Ireland's debt is still growing, thanks to the desperate bailing out of its banks. Irish critics fear this economic death-spiral could lead to a decade of grinding austerity, a generation lost to unemployment and, worse, the return of a spectre that has haunted Ireland for two centuries: mass emigration.

At first glance, the Irish appear to be tackling their plight with a wit that is self-deprecating and ever so slightly proud. "We never really believed the boom. During the Celtic tiger period we were like, jeez, look at us, this will never last," says Lorcan, a father-of-two from Limerick, where Dell closed its Irish operations last year with the loss of more than 5,000 related jobs. "Irish people were used to shit homes, shit education, shit hospitals. In England, there is a cultural memory of things working. There is no cultural memory in Ireland of things working. The self-flagellation gene in Ireland is very strong – 'cut us to fuck because we're used to being the downtrodden victim.' We almost feel better for it."

Pat Ingoldsby, a Dublin street poet, says he can cope without what is now a decimated welfare system. "Daily, I wander through my city with a trolley and a cardboard box full of dreams, and I hear the crashing of other people's jobs all around me. My most treasured possession is that I've got nothing to lose." But Ireland's economic crisis cuts deep for almost everyone else. While ghost estates of new, unsaleable flats stand empty across the land, 170,000 people are struggling with negative equity. Ireland has the fourth-highest unemployment rate in the EU (13.4%), with 432,500 people on the dole; one in three of the working population under 30 is unemployed. And unemployment would be even worse were it not for the return of emigration.

Ireland is scarred by memories of the 500,000 people who fled in the 1950s, and the hundreds of thousands – many highly educated – who left in the 1980s. The loss of dynamic young people helped ensure Ireland's economy stagnated for decades. But critics say it has also been a useful tool for governments, keeping unemployment down and exporting opposition to the Irish establishment. Nearly 20,000 Irish nationals emigrated in the year between April 2008 and April 2009, and research suggests a further 100,000 will leave this year and next.

'We turned into one big Surrey'

With its tourist bikes for hire under newly planted lime trees and its glass-and-steel docklands, Dublin still glossily echoes recent prosperity. In bookshops, too, there is a mini-boom in non-fiction with excoriating titles: Celtic Tiger in Collapse; The Bankers: How the Banks Brought Ireland to its Knees; Banksters: How a Powerful Elite Squandered Ireland's Wealth. "In its rise and fall, Ireland made Icarus look boringly stable," writes Fintan O'Toole in his recent book, Ship of Fools.

In the 1990s, a stagnant agricultural economy was transformed into a highly skilled post-industrial playground. Computing and pharmaceutical jobs were garnished by a turbo-charged property sector. In 1986, Irish GDP per head of population was two-thirds of the EU average; by 1999 it was 111% of the average, and significantly higher than in the UK. Between 1985 and 2006, Irish house prices rose by almost 250%, far higher than in Britain. Emigration became immigration, as Poles and others rushed to share the Irish dream of a self-confident Euro-Atlantic nation, emancipated from the shackles of Catholicism and colonialism. Or as economist David McWilliams puts it: "We turned into a big, superannuated version of Surrey."

While the boom-time billionaires enjoyed an unfettered freedom to build and borrow, O'Toole argues that Ireland's prosperity in the 90s was not simply the triumph of the free market. For most of the 20th century, no other European nation recorded such sluggish national growth; a spurt in the 1990s was Ireland finally catching up. And the global boom of that time saw an unprecedented growth in US investment abroad: much came to Ireland, given the shared language and Irish roots of many American investors as well as alluringly low tax rates. European socialism helped too: Ireland pocketed IR£8.6bn from EU structural funds between 1987 and 1998.

What went wrong? Almost everyone in Ireland points their fingers at an unholy trinity of politicians, bankers and developers for turning this boom to bust. The government blew up a demented property bubble by offering huge tax breaks on new buildings. Construction swelled to account for a fifth of Ireland's economy. Prices, mortgages, wages and costs soared. Unregulated banks went on a lending spree. By the time of the global banking crash, Ireland's banks held a terrifying amount of debt (by 2008 the Anglo Irish Bank held €73bn of loans – half of Ireland's GDP) and the country was the first in the eurozone to enter recession.

People "are pinning blame on one or two bankers but they didn't do it alone," says McWilliams. "We've got to look at a whole professional class – estate agents, lawyers, auditors, investors, crony politicians – who became intoxicated with greed. They didn't hear the warning signs because their ears were stuffed with cash."

According to O'Toole, nothing and no one in Ireland said "enough". Voters did not tell politicians to stop, and politicians did not set limits for developers or the banks. Now, he writes, the question is whether the Irish "have enough constructive anger to kick away a system that has failed them and make a new one for themselves".

Ever since independence early last century, Ireland has been dominated by two rightwing political parties, Fianna Fáil and Fine Gael. Fianna Fáil has governed for the last 13 years (now in an improbable coalition with the Greens), and everyone I meet is furious with a government they cannot vote out for another two years. But as Ireland's ruling classes remark with complacent pride, the Irish are not like the Greeks and the French, nor even the people of Iceland, where popular protests encouraged its government to resign. There has been no rioting on the streets of Dublin.

Two weeks ago, a tiny scuffle broke out by the gates of the Dáil, Ireland's parliament. Last week, in heavy rain, 1,000 people gathered there again for the rather politely titled "right to work" march. The Greeks, says organiser James O'Toole, are much more rebellious. "The Irish are the good children of Europe. They take the rod, they don't complain and they will all get sweets at the end." Why so few protests? "Anger is a private thing in our country; it's there, but we don't express it in public," reckons Ben O'Neill, a protester wearing a badge that says "Fuck Nama". (Nama is the "bad bank" created by the government to remove toxic loans from the economy. It is costing the taxpayer, and generations to come, a fortune: €73bn of public money has gone to the banks so far.)

A demonstrator dressed as Marie Antoinette throws cakes into the crowd. "Fianna Fáil mafia out!" reads one banner. "That's an awful slight on the mafia," remarks someone. There are the usual students and hooded socialist workers here, but also people who are not the demonstrating type, such as Ray and Phyllis Carroll from Shankill. "The cuts have affected everybody," says Phyllis quietly, as a (costly) Garda helicopter thuds above. "The poor. The disabled. The blind. The home-helpers. The most vulnerable in society." She stabs a finger at the Dáil. "They are the only ones who are not feeling the pain."

The Carrolls are living off their savings, supporting their youngest through university. Ray's disability allowance does not cover their basic living costs. "There's nothing left in the kitty. The savings we've taken years to put together have gone. They've made clowns of us," says Ray. "You hit rock-bottom in this country now and you're left in the road to die."

Despite 100,000 people protesting after the budget cuts in December, there has been no winter or spring of discontent. Richard Boyd Barrett, a councillor for People Before Profit, is furious with union leaders. "They've spent most of the last 20 years sharing steak sandwiches with government officials," he says. "They've developed a lifestyle that is akin to the employers they spend their time talking to."

Now the unions are out in the cold. David Begg, leader of the Irish Congress of Trade Unions, has become a vocal critic of the government in recent months. "The access and influence we had isn't there any more," he says heavily. "The reason it collapsed is because the government wouldn't retain the terms of 22 years of social partnership, which was abandoned by government and employers at the first sign of trouble."

In this land of mass unemployment, workers are struggling to protect their jobs. An employee of Quinn Insurance, a boom-time success story recently taken into administration, is too scared to give his name because he has joined a union. He has been told his company is looking for 900 redundancies, more than a third of its workforce. "You go crazy thinking about the economic situation," he says. "My job is at risk, and I feel I've been intimidated over not joining a union. It's very frustrating. I'd expect a lot more anger right now." He has tried to encourage his depressed, stoical peers to join the union, but can't get the numbers. "Some are scared, and others think they can't do anything," he says.

There are also a few people who actually agree with the government's masochistic strategy. "Money became our god during the Celtic tiger years," says a taxi driver, now having to work seven days a week to pay his mortgage, for which he is three months in arrears. "Every one of us is guilty to a small degree." He accepts the cuts. "Most sensible people know the last thing we wanted in this country was the [the intervention of the] International Monetary Fund. Then you don't have a government – the IMF run the country."

Within government itself, advisers privately admit Fianna Fáil will be "eviscerated" at the next election. "The government is very unpopular at this stage. They have to do what's right," says one source, who views this as a liberated government with nothing to lose taking genuinely tough decisions. On an international stage, the Irish are attracting applause from the right: British Treasury officials have discussed how best to effect cuts with their Irish counterparts in recent days, and Ireland's finance minister, Brian Lenihan (who is also having to cope with pancreatic cancer), has been praised in the financial press. Lenihan has called Irish bankers' behaviour "truly shocking" but his government remains slavishly loyal to the global free market. The boom was created by neo-liberalism and will be recreated by neo-liberalism. "We saw what worked 20 years ago. Let's see if it will work again," as one government economist puts it.

Despite sitting at a desk surrounded by thousands of square metres of vacant office space in Dublin's docklands, John FitzGerald, an economist at the Economic and Social Research Institute, an independent thinktank, is far more optimistic than the EU about Ireland's prospects. A studious man who does not mention that his father was once Ireland's prime minister, he forecasts annual growth zooming up to as much as 5% between 2012 and 2015, before falling back to what he calls "boring, European" levels.

Ireland has had to re-price its economy to become globally competitive again, FitzGerald argues. Rents and private-sector wages have fallen following the drastic public-sector wage cuts. The country's strength, and weakness, is that more than half its employment and well over half its manufacturing comes from foreign-owned firms. As the global economy recovers, so will Ireland's, with IT services, software and healthcare making up a new, "smart" economy. FitzGerald believes the government "did a lousy job on banking", but has now got the cuts spot on. "They are wise because they have psyched the people of Ireland up to absorb huge pain. If we are right, they will surprise the people of Ireland in 2013 by saying the cuts are all over."

More surprisingly, he says the popular view that ordinary people are paying for the mistakes of an untouchable elite is wrong, and the masochistic budget has been "probably the most redistributive budget of the last 20 years" – he pauses, drily – "by accident". According to the institute's research, the budget has hit the top 20% of household incomes by 6%, while the bottom 40% have seen rises of up to 2%. "The rich have paid a much higher price than the poor. But everybody is worse off," FitzGerald acknowledges.

Time to leave the euro?

"You got it right, didn't you?" nods the conductor on the Limerick train to David McWilliams. It is hard to imagine another country where an economist would be recognised by passing members of the public, but everyone in Ireland is an economist now. McWilliams, a maverick who presciently warned of Ireland's impending economic conflagration, next month brings "economic stand-up" to Ireland's national theatre. Tonight he is hosting a night of "polemedy" in Limerick: this mix of satire, comedy and earnest debate about Ireland's future, which continues until well after midnight.

"There were very few of us in the boom who suggested what was going on was nonsense. If you're against consensus in Ireland, the first phase is ridicule, then it's violent opposition, and the third phase is universal truth – where everyone pretends they agreed with you all along," McWilliams says, with a smile.

He has two radical, populist solutions: let the banks go bust, and leave the euro. Individuals' deposits could be guaranteed while corporate bondholders would lose out, but the markets would not panic, he believes – rather, they would regard the Irish economy with renewed interest, because money once earmarked to bail out the banks could be invested in the recovery. Saving Anglo Irish Bank "is the economics of Stalingrad", he says. "Throwing all your resources at a symbolic entity signals to the rest of the world that you are a fanatic."

McWilliams also argues that Ireland's attachment to the euro, and the EU, is born of the establishment's traditional desire to eschew the British, who are still Ireland's biggest trading partner. If Ireland left the euro and returned to the Irish pound, its currency would take a hammering. Let it, says McWilliams: if it fell by 40%, suddenly Ireland's wages would be 40% less than its rivals. Investment would flood into Ireland; exports would be super-competitive.

More orthodox voices on the right and left will not countenance either letting Irish banks die or leaving the euro. "You can't let a bank that is half your GDP collapse in the middle of your economy. It pulls the entire economy down with it," says a government economist. FitzGerald adds: "If the Irish central bank had to go out and borrow tens of billions to replace the euros in the banking system, there is no way they could raise it. There would be a dramatic fall in the currency, a dramatic rise in interest rates, and a complete collapse in the economy. Leaving the euro would be lunatic."

Of FitzGerald's predictions that the Irish economy will return to business as usual next year, McWilliams says: "That's horseshit. The establishment view is what we need is more of the same. The most important thing about crises is it gives you permission to change."

The Irish have not yet identified plausible alternatives to the Fianna Fáil/Fine Gael duopoly – although the Irish Labour party is at an historic high in the polls – but McWilliams believes many people are looking beyond the discredited establishment, and seeking revival through grassroots debates like the night he comperes in Limerick. Perhaps this crisis could spark something similar to the creativity unleashed a century ago by the struggle for independence. "Economics is like anything else," says McWilliams. "The innovator wins."

However, rather than crisis heralding opportunity, it is fear and a grim lack of political alternatives that weighs on the newly homeless Ann and Christy Moore, who are turning to the courts in an attempt to get their home back. Christy worked on building sites during the construction boom, but is now on social welfare. Two of their three children are unemployed; the third has just found work on a 12-week contract.

Christy is left battling with the shame of losing his home: "You should be strong but you feel so low – just finish me off, shoot me, put a bullet in my head," he says. "And all the time you hear you have to tighten your belts, which is an insult to people's intelligence. It's fear – that's why people aren't rising up. But we mustn't fear the corrupt politicians and bankers and developers, because that's what they want."