Cowen is banking on borrowing to balance the books
At the end of September the National Treasury Management Agency put our debt at €39 billion. It is the highest it has been since 2000 and demands about €2bn a year in interest payments. Yesterday, Finance Minister Brian Cowen said this will grow by €1.8bn to cover a deficit of 0.9%.In theory, countries can borrow as much as others will lend them. In America the debt is measured in trillions and grows at a rate of US$1.5bn a day.
Since the bountiful days of 1997 we have been in surplus. It was the first time the State was in profit and it continued until yesterday. It changed because of a fall in property sales with a reduced income from stamp duty. Mr Cowen said the economy is now €1.8bn below target. To solve this, Mr Cowen has to either raise taxes and boost income; cut spending to lower overheads; or ask for a loan.
He decided to go to the bank while trying to lower overheads by asking for greater productivity from the public sector.
There will never be consensus on what is acceptable borrowing, the same as arguments for using a credit card or taking a bank loan.
Before the election, Mr Cowen outlined his priority was to balance the books but this has not happened. Yesterday he opted to borrow but only for capital projects with long -term benefits. In effect he has taken out a mortgage to pay for the National Development Plan/Transport 21 but will not whip out the credit card to meet day-to-day expenses.
The International Monetary Fund, the World Bank and other global financial organisations. We have an exemplary credit rating with a stable political structure and low interest repayments. The only major reservation is our reliance on larger economies.
For 74 years we had to ask lenders for money to balance every single annual budget starting in 1923 with a loan equal to €3m. The debt doubled to €63m between 1928 and 1934 and paid for ambitious new infrastructure projects.
Through 50s and 60s the burden grew by €50m a year. It did not become a problem until 1979 after Fine Gael’s Richie Ryan set the trend for a relying on foreign debt. Through the next decade it increased at an average rate of €2bn a year to €31bn.
At the end of the 1980s we were teetering on bankruptcy and borrowing to pay interest on loans. Both Fine Gael and Fianna Fáil governments collapsed because of it.
This was until Fine Gael’s leader at the time, Alan Dukes, announced the Tallaght Strategy and offered to stop outbidding election promises as long as Charles Haughey’s government controlled spending. He obliged and the era of economic consensus was born.
Since the Tallaght Strategy politicians have agreed the economy is sacrosanct. Instead of left-wing and right-wing struggles political parties debate within the confines of a well-managed economy with limited borrowing and constraints on public spending. Our obligations to the European rules have also kept us in check.
There are short-term or long-term loans. And long-term options come with lower interest rates. Throughout the 1990s it became policy to go for fixed rates and long-term deals. At the end of 2006, 88% of our debt was part of medium and long-term agreements.
Each loan will have its own interest rate. Our National Debt is made up of a cocktail of different agreements and the interest varies. Our move towards long-term deals happened as international interest rates moved from close to 10% to near 3%. This means for each Euro we pay towards our loan a greater percentage is chipping away at the capital rather than paying off interest.
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