Political Reporter Mary Regan unravels the nightmare of our public finances and sovereign debt and looks at what the figures mean right now and what they could mean for us in the future.
TO "virtually eliminate national debt" by 2012 was the big economic promise of Fianna Fáil in its manifesto for the 2007 General Election. By the time you finish reading this article, our debt will have grown by another €1 million.
But no one is counting the millions now. The debt mountain is somewhere above the €91 billion mark. It is growing by €35,000 a minute, taken as an average over the year, and the digits move so fast, it’s hard for the human eye to follow them.
So rather than taking us out of the red as promised, the Fianna Fáil-led Government has plunged us into a sea of red ink, in which the country has been struggling to stay afloat and now appears to be sinking.
If you consider Ireland as a household, and knock off a few zeroes this is its problem. It is earning an annual salary of €35,000 but spending €55,000 a year. The remaining €20,000 is being borrowed. The moneylender is worried we are not going to be able to pay it back, and is increasing our interest rates accordingly.
In fact, we now owe them €90,000 – a hell of a lot more than our annual household income. We owe about €4,000 of interest. The lender now believes the risk of us going broke is so strong, it wants to charge us around €9 for every €100 borrowed.
We are used to having debt, but not this high. And usually it would not be a problem because our wages go up year by year while the interest does not. But now, our wages are doing down and interest is heading in the opposite direction.
(Oh, and we forgot to mention the small problem of €35,000 we have to put into a piggy bank which was used to buy overpriced property in the good times. Well, it could be €70,000. But we don’t want to talk about that now).
We might just have to call our wealthier cousins in Brussels to help us out, but if we do, they’ll only tell us how to spend our money.
Our aunt in Germany says we should give priority to spending on our own household, and let the money sharks come second. But that only makes markets more nervous and inclined to charge us more interest. It’s a vicious circle.
This is not just one household, this is our country and here are the basic sums.
- €54.5 billion: The cost of running Ireland in 2010.
- €35.25bn: What the Government is taking in, mostly through taxes, this year.
- €19.25bn: The sum that Ireland is borrowing from the markets this year to meet that shortfall.
- 32%: The percentage of the country’s total value which will be borrowed this year. In other words, what our deficit, or budget gap is, as a percentage of our GDP.
- 3%: What the Government has to cut this to by 2014 to satisfy the other eurozone countries with whom we share a common currency.
- €15bn: The sum the Government reckons it has to cut over the next four years to get our deficit down to this figure.
- €6bn: What it will "front- load" to next month’s budget so the cuts will be less severe in 2012 and 2013.
The Problem:
- €19,250,000,000: The expected size of the budget "black hole" in 2010 – or the gap between what the Government is spending compared to what it is taking in – or Ireland’s national deficit this year.
- €18,750,000,000: What the Government forecast the deficit would be at the time of the budget last December.
- €39bn: The amount spent on day-to-day running of the country so far this year, compared to €38.5bn this time last year.
- €24.6bn: The amount taken in tax so far in 2010, down from €26bn the same time last year.
- €3.2bn: The amount we have spent on servicing our national debt so far this year, compared to €2.5bn this time last year.
The Banks:
- €34bn: The Government’s estimated final cost of nationalising Anglo Irish Bank.
- €1.5bn: The sum to be paid in interest every year for the next 15 years on €30bn borrowed to bail out Anglo.
- €46bn: The bank bailout cost when other banks are taken into account.
- €70bn: What some economists believe the final bill for Anglo, AIB and Bank of Ireland will be. This amounts to every penny in tax paid for the next two years.
The Borrowing:
- €51,369,863: What the Government thought it would need to borrow each day of 2010 when the budget was drawn last December.
- €53,424,652: What it actually needs to borrow every day in 2010 to run the country.
- €1,100,000: The sum they are over-borrowing by per day, compared to forecasts.
- €91,276,000,000: Ireland’s accumulated national debt (changes by €2.1m every hour, or €35,578 per minute – so if you read this in the morning, just add a couple of million, if it’s evening, rack it up by about €12m-€14m).
- €4,617,000,000: The annual cost of servicing this national debt when we get around to paying it back a few years down the line. (To put it in context, it is more than was cut in last year’s budget; it is more than the total cost of dole payments this year; it’s almost the same as the cost of running our school system for a year).
- €8,970,000,000: The annual cost of servicing debt if we were to go to the bond markets this week, based on interest rates yesterday. But the Government thinks we will not have to do so until the new year.
The Solution:
- €15bn of cuts over the next four years to bring our deficit down to 3% of GDP by 2014.
This is twice the figure suggested in last year’s budget. But for this to work depends on:
- 5% increase in exports of goods and services as other economies improve.
- 0.75% increase in consumer prices next year.
- 17,000 more people to lose their jobs this year and an increase of about 2,000 next year.
- 1.5-2% decline in economic growth next year .
What does this cut mean for you?
- €6bn of cuts in the 2011 budget which could be achieved through:
- €25m for every €1 reduction in the old-age pension
- €73m earned from every €1 cut in the dole.
- €13.8m savings for every €1 cut in children’s allowance.
- €1,000 a year property tax would earn €1.1bn a year for State coffers.
- 7.5% "Universal Social Charge" on your income, regardless of what it is.
And if doesn’t work?
Bankruptcy for Ireland, if the markets are not convinced by our plan and refuse to lend to us when our money runs out in the middle of next year. Step in the European Stabilisation Fund or the IMF.
YES WE CAN
Success is in our hands – but political leadership is needed
By Professor John McHale
NO one needs reminding that we are in a tight corner. Based on the yields demanded to hold Irish bonds this week, potential lenders now think it considerably more likely than not that Ireland will default – and that is even with the option of tapping the EU/IMF bailout facility.
While clearly in a difficult place, I believe that the economic fundamentals are such that we can, with a bit of luck and by pulling together, avoid a bailout and default.
Even on relatively conservative growth assumptions, and with the proviso that interest rates on Irish debt fall back to more affordable levels, the four-year deficit reduction plan should allow us to successfully stabilise and then begin to reduce our debt to GDP ratio. Critically, I believe the interest rate will fall back if we can make a credible commitment to the four-year plan. Success is in our hands.
At this stage the challenge is as much political as economic. Our politicians have swung to the default mode of squabbling. Various interest groups are also digging in their heels.
People can’t be blamed for trying to protect themselves, as there is no assurance they won’t be forced to bear a disproportionate share if they don’t resist. But the result is likely to be collectively damaging. Political leadership is urgently needed to break us out of this dilemma. The path through the fiscal crisis requires a three-pronged political and economic strategy.
First, the Government must produce a plan for the upcoming budget and the remainder of the four-year timeframe that is generally viewed as being both adequate and fair. With the advantage of Commissioner Rehn’s endorsement, the €15 billion adjustment over four years to reach a 3% of GDP deficit target by 2014 sets the parameters for adequacy. We might disagree with some of the details (I would have gone for a bit less frontloading than the planned €6 billion), but the targets are now the obvious focal points for convincing lenders we are creditworthy.
Crucially, people also have to be assured they are not being individually targeted to bear an undue share of the burden. This requires a well-articulated plan that spreads the burden broadly and progressively. After a number of years of across-the-board bubble-funded spending rises and tax cuts, most will have to be asked to make some sacrifices, with the better off being asked to do most.
In their recent spending review, Britain’s new coalition government showed the value of crafting and communicating a "fair" package of measures. In putting together our package, the Government should make use of the ESRI’s distributional analysis model (SWITCH) to both measure and inform about the allocation of the burdens.
Second, we need a limited form of cooperation between the political parties to get the budget passed. In normal times, I very much support the idea of vigorous opposition. But with our solvency hanging in the balance, these are not normal times.
There would be a large credibility bonus if the opposition could agree to support the budget, in part to neutralise the effect of backbenchers and independents unwilling to put sectional and regional interests aside. The parties should also set out their own four-year plans, making clear how they would substitute credible offsetting measures for the elements of the government’s plan they oppose.
Unfortunately, I think it would damage our position if an election is forced before the budget is safely passed and the four-year plan is in place. While it is hard to argue against letting voters have their say, there is a real risk that the campaign would descend into a bidding war for the votes of various interest groups rather than a referendum on competing adequate and fair adjustment plans. (If there were any doubts on this score, the early soundings from Donegal South West should have put them to rest.)
We could easily end up with the democratically self-defeating outcome of having the adjustment terms partly dictated to us in a bailout agreement. As a fair return for their help in getting the budget passed, however, the opposition parties could reasonably expect a commitment to hold an election early in the New Year.
Third, the capacity to put the needed plan in place depends not just on politicians, but on all of us. While it is a lot to ask, we will have a much better chance of success if various interest groups – from students to pensioners – can show a limited form of social solidarity. By this I do not mean we passively accept a disproportionate share of the sacrifice in the national interest, just a willingness to do our part in a fair overall plan on the assurance that others will be asked to do the same.
I am convinced there is a willingness to do what is needed if it is shown there is a path through the crisis and back to sustainable economic growth. I think there is such a path, though we are not yet on it. We need our political, economic and social leaders to step up to the challenge.
Professor John McHale is Head of Economics at the School of Business and Economics, National University of Ireland, Galway.
NO WE CAN’T
Exempting bondholders from the burden has backed us into a corner
By Dr Constantin Gurdgiev
DESPITE all the intensifying talk about EU support; despite the growing number of assurances from the various officials and social partners that we can "grow out of our difficulties"; this week has clearly shown that Ireland is nearing the end game of the crisis.
Tellingly, even the usual official policies’ cheerleaders, our stockbrokers, have deserted the State side of the arguments. As one analyst from the IFSC put it earlier this week: "You know the game’s up when you can’t round up your own sales team to sell Irish bonds."
The game is almost up. On the assumption of a 70% recovery rate, the Irish 10-year Credit Default Swaps imply an 85% probability of Ireland defaulting sometime in the next 10 years. This, of course, is not the real probability, but an estimate. However, in comparison, even countries that availed over the last three years of IMF assistance, including Iceland, are enjoying much greater confidence in the markets.
We all know how we got into this predicament. Three years into the crisis, the Government continues to spend well beyond its means. Our current spending keeps rising. Tax revenue, despite significant tax hikes, is running below 2008 levels.
The markets know that the Government has by now exhausted all means for extracting more cash out of this devastated economy.
The much anticipated Budget 2011 is unlikely to solve this problem. Cuts of €6 billion from the deficit this year will do very little to restore any credibility in Government policy. In the current conditions, the whole exercise will be equivalent to taking money out of one pocket – Government total spending – and putting it in the other – the banks, bondholders, social welfare and pay and pensions bill.
Instead of standing on a morally and economically high ground and soaking the bondholders early on in the crisis, as Iceland did, the Government has boxed us into a corner and created a full-blown contagion from the banks to the sovereign. With liquidity evaporating from the shorter end of the banks funding market, this contagion is now a two-way street. Untangling this today, without going into a renegotiation of the sovereign bonds and/or guarantees, cannot constitute a credible policy position.
All of this comes before we even consider the real economy side of the matter. With private investment on its knees, and companies, starved of trade and operational credits, operating outside the realm of normal corporate finance, can anyone really claim that we have the private sector capacity to escape a restructuring of the private and/or public debts?
Irish families are now so deep in debt and negative equity that consumption and household investment stalled, while deposits are vanishing to pay rising state and semi-state bills. Squeezed on both ends of their incomes, by falling earnings and rising taxes and charges, these households cannot provide more funding for our fiscal policy pyramid scheme.
But the final straw is the belated realisation that the EU has no plan B for dealing with this crisis. In fact, it doesn’t even have a plan A. This was made absolutely clear by the vacuous nature of statements issued by the EU Commissioner Olli Rehn during and after his visit to Dublin this week.
The fundamental EU problem is that the much-lauded EFSF (European Financial Stabilization Facility) – the fund used to put Greece into a bond market deep-freezer earlier this year – is not designed to address the problems we face. EFSF is designed to help cash strapped governments for a period of the years at ‘near market’ rates. Ireland is not cash-strapped. Nor are ‘near-market rates’ a sustainable lending option for us.
We are plain insolvent when one looks forward three to five years. Our sovereign debt to GNP ratio is likely to exceed 140% by the end of 2015 and this is before we factor in the highly probable wave of mortgage defaults. Our household and corporate debts are more than double those of Greece. And we are staring at the abyss of rising interest rates and strong euro into the next three to five years.
EFSF is simply not fit for the purpose of rescuing Ireland. At current yields, Ireland will need to grow its economy at some 6.5% to 7% on average annually for the next decade to counterbalance the mountain of debt we are carrying. At the ESFS rates – at ca 4.5%.
Anyone expecting this to happen without radical and extremely painful structural reforms of the economy (not just budget cuts) should really go back to the basics of economics. With exception of exporting sectors, our economy has slipped into a coma. Jolting it out of this state will require complete rethinking of our fiscal and economic policies.
As an optimist, I can tell you that this can be done. As a pragmatic observer of the current policy and economic environment, I have little hope it can be done without restructuring our debts – public or private – and issuing a new policies mandate for the political leadership.
- Dr Constantin Gurdgiev is adjunct lecture in finance with Trinity College Dublin.
a d v e r t i s e m e n t
This appeared in the printed version of the Irish Examiner Saturday, November 13, 2010
