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Ireland's political and cultural magazine
— June - July
Against the Grain –Constantin Gurdgiev
Croke Park talks about public-
sector reform and Ireland’s Policy Kindergarten
is still agitated by cuts in Government expendi-
ture. The logic of arguments from the likes of Tasc,
the Irish Times, and an army of Union-employed
‘economists’, is perverse: ‘In order to get the econ-
omy back on track, we need to borrow more and
spend on public services and wages’.
There are three basic reasons why stimulating
the Irish economy though increased public spend-
ing won’t work in current conditions - even in the-
ory, let alone in practice. These are: the structural
nature of the fiscal crisis we face, the size of the
debt we face, and the lack of evidence that stimu-
lus can work in a country like Ireland.
►
Economists distinguish two types of deficits:
cyclical and structural. The first type of deficits
occurs when a temporary economic slowdown
leads to an unforeseen decline in revenue and
acceleration of certain components of spending
(e.g. unemployment insurance and social wel-
fare). By its definition, the cyclical deficit will
be automatically corrected once the economy
returns to its long-term growth path.
In contrast, structural deficits arise independ-
ently of short -term changes in economic growth.
They are the outcome of unsustainable increases
in permanent spending and/or declines in the
long-term growth potential.
In the case of Ireland, both of the latter fac-
tors are at play. Estimates of the extent of struc-
tural deficits carried out by the likes of the IMF,
the OECD, the European Commission, the ESRI
and independent analysts range between one half
and two thirds of the General Government
deficit, or -.% of GDP.
Reckless expansion of Government spending
in the period - is the greatest cause of
these – not the collapse of our tax revenue. In the
meantime, our economy’s long-term growth rate
has declined from the debt-and-housing-fuelled
.% per annum to a Belgian .% per annum.
In , the General Government Structural
Balance stood at roughly -.% of GDP. By
this has fallen to almost -% courtesy of mas-
sive permanent staff increases in the public sec-
tor, rises in welfare rates, an explosion in health
spending and creation of a gargantuan army of
quangoes and supervisory organisations.
Take one example. Currently, the Financial
Regulator (CBFSAI) is paying on average
€, per annum in wage and related costs
for its staff of (shortly to rise to ). Per
average Irish taxpayer the cost is % greater
than in other EU countries. Yet, CBFSAI has
roughly half the responsibility or work load
per employee when compared to our peers. Of
course, given the body performance over the last
years, you might as well have cut their staff
down to one receptionist with an ‘Approved’ rub-
ber stamp and an answering machine with a ‘No
Comment’ message.
Forget, for a second, that most of this expen-
ditures represented pure waste, delivering noth-
ing more than top jobs for friends of the ruling
class, plus scores of jobs for public- and quasi-
public sector workers. Between and today
Ireland has recorded not a single year in which
the Government structural balance was positive.
Windfall stamps-duty, VAT and capital -gains
-tax receipts over - have masked this
reality, as Goldman -Sachs -structured derivatives
masked the reality of Greek deficits.
►
Over recent months, the Government has
been eager to ‘talk up’ our major selling points.
Ireland, it goes, is a country with stabilised pub-
lic finances and a low debt-to-GDP ratio.
In March, Eurostat and the bond markets
exposed the lie behind the ‘stabilized public
finances’ story. It turns out our Government
has decided to sweep under the carpet billions
of Euro it borrowed in to recapitalise
Anglo. Courtesy of this, our deficit for
was revised to a whopping .% of GDP – top-
ping that of Greece.
But Irish General Government deficit this year
is expected to come in between .% and over
% of GDP, depending on who is doing the fore-
casting – the Department of Finance or the ESRI.
And this is before we factor in the March
statement by the Minister for Finance, promis-
ing over € billion for the banks this year. This
means that, as the rest of the world is coming
out of the recession, our fiscal deficit for
is expected to either match or exceed the revised
level achieved in . Some stabilisation.
Irish Government debt is expected to reach
-% of GDP by the end of – on a par
with the Eurozone’s second sickest economy,
Portugal. With Nama and bank recapitalisations
factored in, Irish taxpayers will be in a debt hole
equal to between % and % of GDP by
and to % by . At the point of the
Greek debt implosion last year, Greece had sec-
ond highest debt to GDP ratio in the EU at %,
after Italy with a massive %.
In short, the current crisis-management
approach by the Irish State is going to cost
every Irish taxpayer in excess of €, in
added tax liability. Neither Iceland nor Greece
comes close.
►
Still think that we should be stimulating this
economy through more borrowing?
Take a look at the private sector debts. In
terms of external debt liabilities, Ireland is in a
league of its own amongst the advanced econo-
mies. Our overall debts currently are in excess
of the critically high liabilities of the Heavily
Indebted Poor Countries (HIPCs) to which we
are sending intergovernmental aid. And rising:
in Q , our external debt liabilities stood
at a boggling USD . trillion, up .% on
Q . Of these, roughly % accrue to the
domestic economy – more than six times our
annual national income.
So you think we should
stimulate the economy
through borrowing?
“the current crisis-
management approach by
the Irish State is going to cost
every Irish taxpayer in excess
of €117,000 in added tax
liability. Neither Iceland nor
Greece comes close”.
Ireland’s share of world debt is greater than
that of Japan and more than double that of all
BRICs (Brazil, Russia, India, China) combined,
once IFSC companies are included. Over the next
years, the entire Irish economy will be paying
out around €, per taxpayer in interest on
this debt. Adding more debt to this pile is simply
unimaginable at any stage, let alone when the cost
of borrowing is high and rising.
These figures show that the main cause of
the current crisis is not the lack of liquidity
in the system, but an older-fashioned prob-
lem, insolvency.
This problem is directly related to the actions
of the Irish state. Over the last decade, there was
a nearly % correlation between the average
increase in Irish tax revenues plus the rate of eco-
nomic growth on the one hand and the expendi-
ture growth on capital and current spending on
the other. In effect, thanks to the ‘Boom is get-
ting boomier’ Ahern/Cowen team Ireland had
two bubbles inflating next to each other – a pri-
vate-sector borrowing bubble and a public-sector
spending one. Government’s exuberant optimism,
cheered on by the grinning Social Partners – the
direct beneficiaries of this ‘fiscal policy on steroids’
approach – explains why during Brian Cowen’s
tenure in the Department of Finance, the Irish
structural deficit doubled his predecessor’s
already hefty increases.
But what underlay the glossy Exchequer
reports was the old-fashioned pyramid scheme.
Some got rich. Temporarily, we had an army of
politically-connected developers and bankers
stalking the halls of premier cars dealerships and
property auction rooms.
An entire class of public employees reaped
massive dividends in terms of shares in priva-
tised enterprises that accumulated in their pen-
sion plans. Benchmarking, lavish pensions and
jobs security were cherries on top of the cake.
Managers in public companies got dramatically
increased pay and a permanent indemnity against
competition through a regulatory system that was
all but a client of their semi-state companies. From
our hospital consultants to our lawyers, academ-
ics and other professionals – a large army of state-
protected, often internationally uncompetitive
professional elites collected state-subsidised pay
so much in excess of their real productivity that
we became the subject of diplomats’ jokes.
Our state’s response to this was telling. Just
as the country was borrowing its way into insol-
vency, our Government gave billions in aid to
developing nations. That was the price our lead-
ers chose to pay to feel themselves adequate
standing next to Angela Merkel and Nicolas
Sarkozy at EU summits. , Brian Cowen still
sends hundreds of millions of our cash to aid
foreign states and has recently decided to com-
mit € million – half the amount he clawed
out of ordinary families through income levies
– to the Greek bailout package.
►
Still think more state-centred economy is the
solution to our problem?
Irish economists, primarily those affiliated
with the Unions are keen on talking about the ‘pos-
itive multiplier’ effect of deficit-financed stimulus.
Sadly for them, there is no conclusive evidence
that borrowing at percent amidst double-digit
deficits and ‘investing’ in public services does any
good for the economy.
First, one has to disregard any evidence on
fiscal stimulus efficiency coming out of the larger
states, like the US, where the imports compo-
nent of public and private expenditure is much
smaller than in Ireland. The US estimates of the
fiscal stimulus multiplier also reflect a substan-
tially lower cost of borrowing. Even if Ireland were
to replicate US-estimated
fiscal stimulus effects, the
higher cost of our borrow-
ing will mean that the net
stimulus to Irish economy
will be zero on average.
Second, international
evidence shows that for
a small open economy,
like Ireland, the total fis-
cal multiplier effect starts
with a negative -.%
effect on economic growth
at the moment of stimulus
and in the long run (over
years) reaches a negative
-.-.%. Add the cost
of financing to this and the long-term effect of
the deficit-financed stimulus for Ireland will be
around -.% annually.
Third, no one on the Left has the foggiest what
the new spending should be used for. Simply giv-
ing borrowed cash to pay the wage bill in the pub-
lic sector would be unacceptable by any ethical
standards. Any investment that is bound to make
sense would have to focus on our business centre
– Dublin, where the infrastructural deficit is most
acute and demand greatest. Alas, this will not
resolve the problem of collapsed regional econ-
omies. Pumping more cash into the ‘knowledge
economy’ without actual knowledge of the exi-
gencies of entrepreneurship is adventurist even
in times of plenty.
In short, the idea that expanded deficit
financing will generate any real economic eco-
nomic recovery is like arguing that pumping
steroids into a heart attack patient will help
him run the marathon.
Ireland needs adjusted thinking and reform.
It should start with significant rationalisation
of expenditure and follow it with a more deeply-
rooted revisiting of the ethos and objectives of
our public sector.
Ireland also needs a significant deleveraging
of what is a basically insolvent economic structure.
This too requires, amongst other things, a signifi-
cant reduction in overall public spending. Far from
‘borrow to spend’ policies advocated by the Left,
we need ‘cut to save’ policies that can, with time,
yield a permanent increase in the national savings
rate, productive private investment and improved
returns on education and skills. Otherwise, our
college graduates may as well receive vouchers for
one-way tickets out of Ireland with their degrees,
underwritten by Tasc, the Unions, the Irish Times
and, presumably, Village magazine.
phOtOs: getty iMages
