So, the Government has a deal on the Anglo promissory notes in hand. There was an unseemly crowing from them and from much of the mainstream media when the deal was announced, the merits (some) and demerits (many) being lost in the laudatory glow.
The deal was politically necessary for them — having staked their reputation on not paying the €3.1bn this year, they had to produce some formula that would allow that.
A key aspect of the deal is that it gives some breathing space. Many, myself included, have criticised the payment of any taxpayer money for private debts, but the fact remains that the Government is in a better cashflow position now than it had expected to be in when the present budget process was put in place.
This raises the question of what to do with the savings. Let’s leave aside that the savings are, for the future, dependent on the Central Bank holding onto the bonds, and concentrate on the here and now. The savings amount to approximately €1bn per annum for the next number of years.
When a government has money it can do two things — spend it or save (pay off debt). There is an undeniable fact that regardless of the deal, we are still in deep financial trouble. We are on target for €10bn plus in deficit this year — the excess of government spending over income.
While the meme has been fostered that “we are borrowing to pay the public service”, the reality is that government money is fungible. Tax and borrowed money is deployed to pay for state services and to pay for the interest on borrowed money. No tax head is earmarked for teachers salaries; no bond is raised for the guards’ overtime. And it is that fungible nature that is important here.
The reduction in planned borrowing can be put to the more rapid reduction of the overall likely burden of the national debt. That is a good way to spend it. But all government funding should be evaluated on a cost-benefit basis.
That is not the same cost benefit as would be used in a private company — the Government has a social as well as economic payoff to take into account. While not building up a debt is a good thing, the question now is — is there an alternative use for this money? Were it to be borrowed, that would generate a higher marginal (social and economic) return than not borrowing it and retarding debt accumulation.
The call has been made to borrow this and to invest in capital. But the question is what kind of capital? The CIF would no doubt wish to see large-scale engineering projects. But we have a decent, if needing some completion, motorway network. Siptu has urged that the savings be used for job creation, but there is a lack of evidence that government helicopter money yields significant job creation. We need to think outside the box if we wish to borrow this money and use it.
Two forms of capital rarely get mentioned — social and political. Take the latter — the reality is that we will still face into increased taxes, more taxes, reduced services and more expensive services Political capital has been squandered for two years in continuing to row back on promises made. If the Government want to bring the population along with them for the next half of their tenure they need to show that the pain has been of some benefit. Modification of the fiscal adjustment to the relative benefit of lower and middle income earners via some part of the savings would yield political capital now to be spent in the future on truly transformative and thus disruptive changes to how we run the economy
Social capital, the glues that bind us as a society, have a complex but ultimately powerful impact on economic growth. As the recession has advanced, we see that large parts of the country are in danger of eroding the social capital base. People in unsaleable pyrite mansions; in developing sink estates in rural areas that are poorly served with transport or modern IT; in far exurbs that demand hours of commuting; or in negative equity — so deep that they can more easily move to a job in Dubai than Dundalk — are going to see their social capital eroded.
If we wish to use the money well we could do worse than deal with some of these problems. At the very least, we should not reflexively recoil from borrowing in horror.
At some stage, this depression will end and the economy will stabilise. We need to start planning, something we are not good at doing, to build the kind of society we want to have. Because we live in a society, not just an economy.
- Brian Lucey is professor of finance at Trinity College Dublin
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