There’s a perception that Ireland’s monster debt – it will be €240 billion by the end of the year, on a per-capita basis the third highest in the world – was put there by band of rogue bankers. And that we as a people have been victims of a terrible wrong.
The truth is stickier and more unpalatable than the bar-stool narratives we tell ourselves.
Most of the debt – more than €100 billion – arose from a sequence of budget deficits run up in the wake of the 2008 financial crash and linked to the then government’s mismanagement of the public finances, a government that was voted into office three times in succession.
The former Fianna Fáil-led administration had spent lavishly in 2000s while using windfall taxes from the property sector to plug the holes in its accounts.
When these taxes dried up, the deficit ballooned. At the height of the crisis in 2009 the deficit was €23 billion. That meant the State was spending €23 billion more than it was taking in by way of taxes and other income.
This necessitated borrowing on a grand scale, which went on – to a varying extent – for a decade until the State ran a budget surplus in 2018.
The original cost of bailing out the banks was €64 billion but this has been clawed back to about €40 billion by way of levies, dividends and share sell-offs arising out of the State’s ownership of the banks.
It’s a big number, but less than half the bill foisted upon us from budgetary mismanagement, none of which can be clawed back.
On a per-capita basis, the State’s debt figure equates to €46,000 for every man, woman and child in the State and €103,300 for every worker.
And servicing it has cost us €60 billion over the past decade: equivalent to three years of health spending. Make no mistake, the State is paying for its boom-time folly.
So it would be wise to sit up and listen when the Irish Fiscal Advisory Council (Ifac) sounds a note of caution about the Government's budgetary strategy, particularly when it claims we're sailing close to unsustainable debt trajectory – and not to dismiss the council's critique, as some do, as an act of fiscal pedantry, far removed from the realpolitik of government.
While the €4.2 billion spending hike earmarked for Budget 2022 is broadly welcomed, the council takes issue with the Government’s medium-term budgetary strategy, which envisages a series of much bigger budget deficits out to 2025 and nearly €19 billion in additional borrowing.
Less manageable
This will leave the State with a bigger and less manageable debt up the line and therefore more exposed to the next crisis. There is now a one in four chance of the national debt moving on to an unsustainable trajectory in the years ahead, the council says.
The council also warned that borrowing and ramping up spending during a strong recovery could “backfire”, triggering an acceleration in prices if capacity constraints, most notably in the construction sector, bite.
You would think that as a country with a big debt, the chief threat here is rising interest rates, something that is likely to arise if the current pick-up in inflation proves longer than expected.
The council has stress-tested the Irish economy against possible interest rate hikes and growth shocks, finding the latter poses a greater problem.
While a big 2 percentage point shock to the Government's borrowing costs would add just 0.4 percentage points to the debt ratio in three years, it would barely raise annual funding costs. This is largely because the National Treasury Management Agency (NTMA) bond issuance is long-dated and, in the main, fixed rate.
In contrast a typical growth shock of 3.6 per cent for two years could add more than 20 percentage points to the debt ratio in three years. “With high debt ratios to begin with, this could snowball and make it difficult to pull down debt ratios in later years,” it said.
Brexit plan
Two years ago, NTMA chief Conor O’Kelly was asked what the chief financial risks facing the agency were and if it had a Brexit contingency plan.
He said the agency operated on "permanent contingency" basis . As a small, highly indebted economy that relies on international investors for 90 per cent of its borrowings, he said Ireland and the NTMA needed to be in a permanent state of crisis readiness.
The reality is that the next shock, the next thing that will hit our funding market, will probably be something that we have not yet thought of and is not on the front page of every newspaper in the world, O’Kelly said. Nine months later, the Covid crisis hit, the global economy fell off a cliff and the NTMA’s borrowing plans were out the window.
This goes to the heart of the council’s commentary: it’s not a case of wondering if there will be another recession or if there will be another financial shock, that’s a given – they’re coming on average every 10 years.
Downturns are part of the natural cycle and financial shocks are part of the global economy. The question is: will we be in a position to borrow and spend our way out of it?
