Last weekend Taoiseach Leo Varadkar replied to an anonymous tweet, which had questioned the State's bid for a seat on the UN Security Council as a "bad Irish joke" given that Ireland had borrowed millions from the UK during the crisis " to survive".
The Taoiseach replied : “Have paid back all we borrowed from the IMF plus interest and early, Ireland has no budget deficit now and we have a Rainy Day Fund. Happy to do same for UK and help them out financially in the future if they need it…”
No doubt the Taoiseach had his tongue at least partly in his cheek. But just how solvent is the Republic now? What do we owe and how does our position compare to the UK? What impact is this living on spending on key services and taxes? And are we really likely to be in a position to help anyone out in future?
Have paid back all we borrowed from @IMFNews plus interest & early. Ireland has no budget deficit now and we have a Rainy Day Fund. Happy to do same for UK and help them out financially in the future if they need it for some reason...
— Leo Varadkar (@campaignforleo) October 20, 2018
What do we owe as a State and how financially strong are our finances?
Our gross national debt is around €200 billion. The traditional measure of whether this is sustainable or not looks at our national debt as a measure of Gross Domestic Product (GDP), which is now around 64 per cent, not far above the EU guideline of 60 per cent.
But as we know our GDP figures are artificially inflated by the activities of major multinationals here. When these are stripped out, our debt as a percentage of a new measure developed to net out the impact of the multinationals – Gross National Income* ( pronounced GNI star)– is a lot higher at around 105 per cent. The National Treasury Management Agency (NTMA), which manages our national debt, reckons that the truth – or a realistic measure –is somewhere between the two figures. Either way, we still have a lot to repay in the years ahead and it is a key vulnerability in our armoury.
Taking into account the cash and other financial assets that the State holds reduces the net debt figure, of course. And we have have shareholdings in the banks to cash in. So we do have some leeway.
And there are other ways to measure the debt burden. One is to look at the repayments and see how much tax and other revenue they take up each year. In Ireland, national debt interest accounts for around 7.7 per cent of revenue, compared to an EU average of 4.4 per cent.
The UK’s debt position:
The UK’s national debt is just under £1.8 trillion ( €2 thousand billion). It rose sharply during the crash, thought nowhere near as spectacularly as Ireland’s. We saw above that the NTMA estimated that a real measure of Ireland’s debt burden would be somewhere between the ratio to GDP and GNI*. Ironically the UK’s debt ratio is 84 per cent, exactly half way between the two figures. Debt servicing takes just under 7 per cent of UK government revenues, just slightly below the Irish figures. So in terms of our annual finances there is not a lot of difference here.
What about the sustainability of Irish public finances now?
With the budget largely balanced for next year – for the first time since before the crisis – there will be no difficulty in repaying what we owe on our debts or raising fresh borrowings, even if they start to cost a bit more as interest rates gradually rise. So far the State has largely escaped the impact of tremors in the Italian bond market, though this is also something to watch.
However we have seen before how quickly Irish tax revenues can turn downwards. Were this to happen, the high level of our debt and the need to make repayments would limit our ability to adjust tax and spending if the economy hit any problems. With a need to invest heavily to tackle problems in housing in particular and also fund key services like health, whoever is in power when the economy slows would then face tricky choices.
As the Taoiseach tweeted, we are setting up a new rainy day fund, putting €500 million in from the 2019 budget and an initial €1.5 billion switched from the Irish Strategic Investment Fund. However, the Parliamentary Budget Office, the Dáil budget watchdog, criticised the Government this week for not putting more into the fund next year, given strong corporate tax revenues and said the public finances could be exposed in the event of a no-deal Brexit.
The flip side is that if growth remains strong and above 3 per cent each year, then the budget should move into surplus and leave a bit more leeway.
The UK’s borrowing position:
UK borrowing shot up during the crisis, reaching 9.9 per cent of GDP in 2019/10. As in the Republic, borrowing has gradually come down and will beat targets this year, coming in around 1.2 per cent of GDP. The UK chancellor, Philip Hammond, will outline new targets in next week’s UK budget. However, under pressure to spend more on health and public pay – sound familiar? – he will likely repeat that he does not see the budget going into surplus until the mid 2020s. And of course much will depend on Brexit, where a hard version will reduce the growth outlook.
What about the impact of our debt on taxes and spending ?
It is significant, costing €6 billion a year to repay. The only consolation is that back in 2014 the estimate was that by now repayments would be costing close to €10 billion a year. In the context of the Irish exchequer finances, this is a massive difference. However the debt repayment burden is still very significant. It equates to more than 10 per cent of tax revenues, for example, or one quarter of all the money collected in income tax. Before the crisis, our debt repayments were just €1.5 billion a year .
Of course borrowing is not “bad” if it delivers a social or economic return and most borrowing now goes towards investment. However, we are still paying the price of the big increase in borrowing and thus national debt during the crisis, due to the collapse of the public finances – which accounted for a huge increase in debt – and of course the bank bailouts, which did the rest of the damage.
This is one area of spending which cannot, of course, be cut. And that is why high debt increases vulnerability in the case of a sharp slowdown, as the adjustments have to come elsewhere.
To whom do we owe the money?
At the moment we owe around €138 billion to investors – insurance and pension funds and the like – who have bought long-term Irish debt. Some €12 billion is held in special bonds by the Central Bank – a legacy of the bailouts of Anglo Irish Bank and Irish Nationwide.
Around €45 billion in loans agreed as part of the 2010 bailout remain to be repaid. Of the bailout money, all the cash borrowed from the IMF – most of it at relatively expensive rate of 4 to 5 per cent – has now been repaid. We raised new money at cheaper rates to do this. We still owe the two EU funds from which we borrowed around €41 billion, most of which will not fall due until after 2027.
Ironically, given the Taoiseach’s comments, we still owe the UK €4 billion, in relation to a loan which the UK extended as part of the bail-out programme. Around €1.6 billion of this is due for repayment in 2019, €1.9 billion in 2020 and just under €500 million in 2021. We have also been paying interest on the loan,amounting to some £490 million to date, on the basis of data revealed by the UK Treasury in 2017, or around €550 million at today’s exchange rate. We did not repay the UK loan early – like some other crisis borrowings – as doing so would have triggered a €200 million penalty clause in the contract.
The exposure of the UK banking system to the Republic and UK exporters to the Irish market were quoted by the UK Treasury as reasons for lending the money in the first place.
How does the outlook here compare to the UK?
Both economies have stabilised after the crisis – but both have emerged with relatively high national debts, creating a vulnerability for when the next slowdown hits. Ireland has a stronger record of recent economic growth and a younger population, both significant plus factors.
On the flipside, as a small open economy we have seen how volatile Irish growth can be – from boom to bailout and back to boom in a decade – and how we are reliant on US multinationals to drive growth and tax revenues. The UK is a larger economy and as it has its own central bank thus has more flexibility.
But the key point is the obvious one. The UK is exposed to the outcome of the Brexit talks – but so is Ireland – and both face serious risks from a no-deal Brexit or one which leads to significant trade barriers. As we look to the next couple of years, we are firmly in this one together.
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