Don’t panic – we’re not nearly as badly off as we are led to believe

WE’VE had a few weeks of sheer panic.

Now it’s time, surely, to get a bit of perspective. Or, as David Begg might put it, to allow decency to enter the debate.

All this kite-flying about cuts in social welfare benefits and reductions in the minimum wage, if we allow it to develop into policy, will transform Ireland into a bitter place.

It will increase alienation among a lot of young people – many of whom are working for the minimum wage now. And it will further embed poverty in the many housing estates that are close to being ghettos now.

We’ve got to stop this talk. We’re not on the brink of ruin, we’re not about to lose our independence. We’re still a sovereign nation – and we’re still a rich one. Sure, we’ve got to tighten our belts a bit, all of us.

But let’s not forget that the poorest people in Ireland have already seen major cuts – the Christmas payment is gone, child benefits have been cut back, supports for getting kids to school have been drastically reduced.

The crumbs from the rich man’s table have already begun to disappear.

So what about this business of debt – why is the national debt being used in the way it is to frighten the life out of us? To listen to some commentators, you’d think we had never been in debt before, that our debt was far worse than anyone else’s and that the only way we could possibly cope was by screwing the poorest people in the country.

There’s a bit of controversy on the radio about a small tax on mobile homes and the Government runs a mile from it – but the more controversy there is about the minimum wage, the more signals come out that the Government is preparing to press ahead with some kind of change.

It couldn’t be, could it, that the Government is happy to screw people who are less likely to vote in the next election?

Let’s talk about the debt for a minute. Most people who are lucky enough to get their end up buy their own homes in Ireland. How do they do it? They sign a mortgage, that’s how.

And a mortgage, for the vast majority of people, represents a 20-year commitment to paying off a debt. Usually, the debt is far more than you can possibly imagine the day you sign it.

We all know people – families where both partners are working – and the debt they are paying off is far more than their combined income. It’s not at all unusual nowadays to meet people with a combined income of less than €100,000 and a mortgage three times that.

Of course, families in that situation are especially fearful nowadays. Mortgage rates look as if they’re going to start rising again, mortgage interest relief is disappearing and the value of houses has dropped quite significantly.

It’s not the healthiest position to be in (and by the way, what has happened to the Government in terms of unpopularity will pale into complete insignificance if they allow mortgage interest rates to rise in order to support banks’ margins – that could lead to riots on the streets).

But even though people might be worried about their mortgages now, they don’t worry about the principle of having a mortgage, do they? And as well as being a 20-year commitment, a mortgage has one other interesting characteristic.

Most of us have no wealth at all when we take out a mortgage, we’ve only got income. The mortgage buys us a house and again, for the vast majority of us, the house becomes our only significant asset.

No matter how much we owe the bank, we tend to think of ourselves as having some wealth when we buy a house – something to leave the kids. And even if the value of the house isn’t rising as fast as we would like, we’re still not planning to go anywhere.

It never really dawns on us, when we’re taking out a mortgage, that we’re incurring a debt that represents perhaps 10 times our personal wealth, and that’s going to take most of our working lives to pay off.

If we panicked about that thought, none of us would ever buy a house, would we? And yet when our country gets into debt – even though it has both assets and income – we’re all supposed to fly into a blind panic. I don’t get it.

The National Treasury Management Agency (NTMA) is the body responsible for raising money for Ireland when we need it. Effectively, they go out and borrow it – they sign the mortgage on our behalf. When the NTMA was set up originally back in 1990, the national debt was almost exactly equal to our national wealth – to be exact, our total debt as a country was the equivalent of 95% of our GDP that year.

But you know something? Over the following 17 years our debt, expressed as a proportion of our wealth, fell steadily every year until it reached 25% in 2007. Suppose you took out a mortgage and bought a house in 1990. Back then, you never figured that the house could be worth more than the debt.

But everyone who bought a house 17 years ago, without exception, is sitting on an asset that’s worth far more than it was then – and unless they’ve been topping up their mortgages, the debt has gone down considerably. It’s exactly the same with Ireland.

According to the NTMA, our debt, expressed as a proportion of our wealth, increased to 43.2% in 2008. However, and I’m quoting the NTMA here, that’s using measures approved by the EU, which doesn’t allow certain things to be offset against the debt.

THE Pension Reserve Fund and the NTMA’s own substantial cash balances represent more than 20% of GDP. Taking them into account, our debt is still no greater than 23% of our wealth. It’s as if your own mortgage had suddenly increased – but at the same time you had got a second house.

How much does it cost to keep up those debt repayments? Well, when the NTMA was started, slightly more than €1 in every €4 collected in tax went to service debts. The NTMA is forecasting that by 2013, after debt has risen considerably, it will cost around €1 in every €6 to service it. In other words, it’s still way below what it used to be. And we are a much stronger and wealthier country when it comes to managing that debt.

This isn’t an argument for going mad, of course. We are borrowing a lot for current services – as if you were using the mortgage to go on holidays and buy the groceries – and that’s not a great idea in the long term. As I’ve written here before, we have to get that spending more under control.

But there’s no basis in any of this for panic, and there’s certainly no basis in our debt problems for deciding to screw the people on the lowest incomes. That wouldn’t just be a scandal and an affront to decency. It would be a crime.