The madness of auction politics has returned

The madness, it seems, has returned.

Perhaps like those insects that lay eggs that can survive drought and then swarm back, it never left, just lay dormant. Santayana’s maxim of the inevitability of repetition if one comes from a position of ignorance could be the war cry of Irish policy: “We repeat our mistakes, and we’re proud of it. Vote us.” And we do.

Booms and crashes are part of the inevitable cycle of modern capitalist economies. One does not have to be a Marxist to appreciate the need for a historical perspective. In fact, the lack of a historical awareness, of a historical context, is arguably a major cause of the recent global financial crisis.

Cycles happen. The role of government is not to try to eliminate them, but rather it is instead to recognise their existence and mitigate against them. That means leaning against the wind, best achieved by some modicum of automatic stabilisers that keep government spending smoother than the path of GDP. Such stabilisers mean that, in a recession, a government runs a deficit, in a boom a surplus (which can then be used to finance the deficit).

The problem for Ireland is that we are already spending the surplus when we have not got it. There is a persistent myth amongst the population that we are bankrupt because of the bank bailout. We are not. That we should have imposed losses on more bondholders is generally accepted. We didn’t. However, if we look at the debt composition, we can see that while what we did was foolish, costly, and morally indefensible, it is not the major part of the problem. This year, we will spend about €8bn on debt service. Of that, an estimated €1.6bn is attributable to the banks. Leaving aside the issue of straws and the spinal strength of camels, this means that €6.4bn in debt service is down to historic overspending. Our national debt in 2007 was €37bn. Now it is just over €174bn. Of the €137bn increase, just over €41bn is attributable to the banks.

Thus, 70% of the added debt is down to government spending more than it takes in. The banks may have been the straw, but the bricks on the camel were loaded on by our own decisions. A great tragedy of the bailout is that, in addition to borrowing, we also flushed down the pan an emergent sovereign wealth fund. A fund, such as that run by many countries, would allow us to both earn money and use some of the income or capital as an alternative to borrowing in times of recession. We bought Anglo.

A large reason for the increase in the debt noted above is that, for decades, we voted ourselves that which we do not have. We have consistently refused to elect politicians who would put in place a modern, European-style tax system where most things are taxed moderately most of the time, allowing a solid flow of income to the state.

We have exempted, in particular, physical property and now face the horribly painful need to balance the books. Even with all that we have endured, we have still got a deficit this year, mostly it is true down to the interest on the debt.

In that context, to start to hear the discussion on tax cuts, on wage hikes, on the need to at once increase spending and decrease tax, that is to hear the sound of a nation of inveterate gamblers wandering back to the table. What is worse, the Government, who should lead, are fixated on the rapidly approaching election and are at best not dampening and at worst encouraging this behaviour.

We see this in regard to house prices. Now is a good time to put in place mechanisms to cool the housing market. Instead, we see denial and fuelling. We see it in public sector pay. Brendan Howlin expressed a hope we had broken the boom-bust cycle this week.

I am sure he was, at the time, 100% truthful and believed himself. Last year, the Government broke solemn promises (yes, yes, politician promises… we know) that they would not come back to the public sector pay well. They did, for €300m, the saving of which was presented as being existentially required. Now, his party is rife with talk about pay rises and tax cuts. If that is not inherently cyclical then it is hard to know what is.

A medium term, that is five- to seven-year budget, should be the norm. A clear statement that the Government will neither cut nor raise its spending by the same amount as the economy would help defuse the “act procyclically to reduce volatility” economic illiterates.

A commitment to reintroduce the National Pension Reserve Fund, to expand it to a Sovereign Wealth Fund and to ringfence it for a decade would also introduce stability. A return to auction politics does nothing but harm.