The truth about Ireland’s monstrous € 240 billion debt: it wasn’t the banks


It feels like Ireland’s monstrous debt – it will rise to € 240 billion by the end of the year, on a per capita basis the third largest in the world, has been put there by a bunch of rogue bankers. And that we, as a people, have been the victims of terrible harm.

The truth is of course stickier, more obnoxious than the bar stool stories we tell ourselves.

Most of the debt – more than 100 billion euros – arose from a series of budget deficits accumulated following the financial crash of 2008 and linked to the mismanagement of public finances by the government of the time, a government that we have elected three times in a row. .

The former administration headed by Fianna Fáil had spent lavishly in the 2000s while using exceptional taxes from the real estate sector to plug the holes in its accounts.

Deficit

When those taxes dried up, the deficit exploded. At the height of the crisis in 2009, the deficit was 23 billion euros. This meant that the state was spending 23 billion euros more than it collected on taxes and other income.

This required large-scale borrowing, which lasted – to varying degrees – for a decade until the state ran a budget surplus in 2018.

The initial cost of the bank bailout was 64 billion euros, but it was reduced to around 40 billion euros through levies, dividends and sales of shares arising from the ownership of the banks by the State.

This is a large number, but less than half of the bill imposed on us due to mismanagement of the budget, none of which can be recovered.

Per capita, the state debt amounts to € 46,000 for every man, woman and child in the state and € 103,300 for every worker.

And the cost of maintaining it has cost us 60 billion euros over the past decade: the equivalent of three years of health care spending. Make no mistake, the state is paying for its boom time madness.

So it behooves us to sit down and listen when the Irish Tax Advisory Council (Ifac) issues a warning about the government’s fiscal strategy, especially when it claims we are getting closer to an unsustainable debt trajectory. .

And not to reject the criticism of the council, as some do, as an act of fiscal pedantry, far removed from the realpolitik of the government.

While the € 4.2 billion spending hike planned for the 2022 budget is widely welcomed, the council challenges the government’s medium-term budget strategy, which envisions a series of much larger budget deficits through 2025 and nearly 19 billion euros in additional loans.

Debt

This will leave the State with a larger and less manageable debt upstream and therefore more exposed to the next crisis. There is now a one in four chance that the national debt will evolve towards an unsustainable trajectory in the years to come, he said.

The council also warned that borrowing and increased spending during a strong recovery could “backfire”, triggering price acceleration if capacity constraints, especially in the construction sector, were to wear off. make it feel.

One would think that as a heavily indebted country, the main threat here is rising interest rates, which is likely to happen if the current inflation pickup proves to be longer than expected.

Ifac tested the Irish economy against possible interest rate hikes and growth shocks, finding the latter to be a bigger problem.

While a large 2 percentage point shock to government borrowing costs would add only 0.4 percentage point to the debt ratio in three years, it would barely increase annual financing costs. Much of this is because the National Treasury Management Agency (NTMA) bond issue is long term and, overall, fixed rate.

In contrast, a typical growth shock of 3.6% over two years could add more than 20 percentage points to the debt ratio over three years. “With high debt ratios to begin with, it could snowball and make it difficult to reduce debt ratios in the years to come,” he said.

Plan

Two years ago, NTMA chief Conor O’Kelly was asked what the main financial risks the agency faces and whether it has a Brexit contingency plan.

He said the agency was operating on a “permanent emergency” basis. As a small, heavily indebted economy, which depends on international investors for 90% of its borrowing, he said Ireland and the NTMA must be in a permanent state of crisis preparedness.

The reality is that the next shock, the next thing to hit our funding market, is likely to be something we haven’t thought about yet and isn’t making headlines around the world, O’Kelly said. Nine months later the Covid crisis hit and the global economy fell off a cliff and the NTMA borrowing plans were out the window.

This goes to the heart of Ifac’s commentary: it is not a question of whether there will be another recession or if there will be another financial shock, it is certain, they happen on average every 10 years.

Downturns are part of the natural cycle, financial shocks are part of the global economy. The question is whether you will be able to borrow and get by.

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