Ireland’s debt is not ‘becoming’ unsustainable ... it is unsustainable

THE Programme for Government is an ambitious document.

It sets out to develop a comprehensive economic policy approach to tackling the core crises we face, from the immediate problems presented by the collapse of the banking sector, to structural issues of public and domestic private sectors inefficiencies.

The programme aims to establish two core principles in policy making that differentiate this coalition from the previous one. Firstly, it emphasises the need to bring into the policy formation an evidence-based approach. Secondly, through the planned inclusion of independent external advisers, the new coalition Government is clearly indicating the need for inducing greater openness and transparency.

All of these developments are to be welcomed but the plan remains largely unanchored in the reality of our current problems and fails to provide sufficient details on some core policy proposals. Take the issue of banking crisis as an example. The document starts by asserting that: “The parties to the Government recognise that there is a growing danger of the state’s debt burden becoming unsustainable and that measures to safeguard debt sustainability must be urgently explored.”

The problem is Ireland’s debt burden is not “becoming unsustainable” but is already unsustainable. In other words, instead of dealing with the core issue of excessive levels of the banks and sovereign debts, the Programme for Government is attempting to address the issues relating to the perceived unsustainability of the rate of growth in our debt.

Why is this difference important? Imagine achieving the objective outlined in the Programme for Government in full and arresting the rate of growth in Ireland’s banks and sovereign debts. By all projections for 2013, not disputed or altered by the current proposal, €220bn will be accumulated by the state in direct and quasi-direct public debts. This will exert interest repayment pressure of €12bn-€13bn per annum depending on financing arrangements achieved under the EU/IMF funding scheme and in relation to the debt roll-overs before 2013. Paying this debt down to 60% of GDP over, say, 10 years will cost additional €9bn per annum in principal repayments (assuming 3% average rate of growth through 2021). This means a massive €21bn-€22bn will be outflowing annually from the state coffers to maintain the path to debt reduction consistent with EU targets over that decade.

What does this translate into in terms of our tax revenue? If the Government were to achieve the tax revenues of 35% of GDP (roughly consistent with the current plans), in 2011 or debt servicing and repayment plan would swallow 37%-39% of our total tax take, declining gradually to 27%-28% of total tax revenues by 2021. Again, these numbers assume 3% growth on average through 2021 and are, therefore, very optimistic.

Backed by the wrong diagnosis of the debt problem, the coalition then moves on to outline a wrong solution. “We will seek a reduced interest rate as part of a credible re-commitment to reducing Government deficits to ensure sustainability of our public finances,” states the programme document. Shaving off even 2% points from the EU share of the bailout (€45bn) will provide relief of just €900m per annum.

Incidentally, these savings will be virtually identical to the overseas aid commitment of 0.7% of our GNP envisioned in the Programme for Government. In a way, the FG/Labour team will be borrowing €910m from the EU/IMF to fund foreign aid (going primarily to the countries already in debt to the IMF themselves), just as the very same Government will be arguing for a reduction in the cost of this borrowing with the EU.

The Programme for Government is dead right to refuse recapitalising the banks before the stress tests under PCARs are completed. But it is wrong to pin the entire recapitalisation strategy on these tests alone. one has to be very cautious in putting blind trust into the forthcoming exercise by our financial authorities as well.

Exactly the same problem of excessive optimism and over-reliance on the first stage advice and assessment from the vested parties (NAMA, Department of Finance, NTMA, etc) permeates the programme’s thinking about the issues relating to NAMA: “We will end further asset transfers to NAMA, which are unlikely to improve market confidence in either the banks or the state,” says the document. The natural question that arises from this statement is: “And then, what?” There is a dire need for a deep review of NAMA with a view to abolishing this unmanageable and economically damaging institution.

And the programme goes on and on to state relatively positively sounding principles — on for example bondholders protection legislation and repairing credit flows in the economy — without actually backing them with a robust plan for how these principles will be implemented.

The new Programme for Government achieves probably no more than 50% of its required objectives. In spirit, it presents a necessary departure from the escapist and economically destructive policies of the past three years. In letter it falls short of what we need, a functional road map toward the real stabilisation and ultimate recovery.

That said — it is an impressive undertaking for the coalition that is just three days old.

* Dr Constantin Gurdgiev is adjunct lecturer in Finance with Trinity College, Dublin.

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