From top: Taoiseach Leo Varadkar and Minister for Finance Paschal Donohoe; Michael Taft
We are getting a lot of frighten-the-horses commentary about our debt: ‘mountain of debt’, €42,000 of debt per every man, woman and child; one commentator referred to our debt as ‘scarifying’.
Should we be concerned about our debt? Yes. But we need to put it in context to avoid over-reactions and missed opportunities.
It has been a wild ride, debt-speaking.
Irish debt levels fell from 86 percent of GNI* in 1995 to 28 percent in 2006. Then it jumped to a massive 166 percent in 2012 only to fall again to 102 percent in 2019.
The trajectory of Eurozone debt, however, was more boring. This year Irish debt will be 16 percentage points above the Eurozone average.
There’s one interesting caveat: Irish debt levels only exceed Eurozone levels because of our bank debt.
The Irish bailout of financial institutions (which stands at €47.4 billion in total in 2018) increased the debt by 30 percent, measured as a percentage of GNI*.
Actually, this understates the impact as we suffered higher interest payments as a result of the bail-out. Were it not for bailing out senior creditors, Irish debt would be below the Eurozone average – even after a savage crash and recession.
This is cold comfort, however. Regardless of the source, regardless of the justice (and with the bank debt on government books, there is little justice), debt is debt and we are liable for it.
We will be carrying this burden for a long time. However, what it does point to is that the economy itself is capable of quick recovery in debt levels.
For instance, in the last seven years Irish debt has fallen by 64 percentage points. No other Eurozone country can match that reduction. And while some have complained that we have not significantly reduced deficit levels since 2015, the same cannot be said for debt levels – which have fallen by 23 percentage points.
Let’s get one thing out of the way. Much commentary focuses on the actual amount of debt – the ‘scarifying’ €200 billion debt. There are complaints that this has not come down since 2014. This is not the key metric, however. Increasing growth reduces the burden of the debt.
For instance, between 1995 and 2007, debt fell dramatically – from 86 percent to 28 percent of GNI*. However, during this same period the actual amount of debt increased by 14 percent – from €41 billion to €47 billion.
A similar trend occurred at Eurozone level – falling debt ratio while the actual debt increased.
Looking forward, the Government is projecting debt will fall from over 100 percent of GNI* to less than 85 percent by 2023. However, there are two caveats: the Fiscal Council’s warning that Government projections are unreliable; and Brexit.
While it is difficult to correct for unreliable projections, we have some projections for Brexit. The ESRI and the Central Bank have both modelled the potential impact of a ‘hard’ or ‘disorderly’ Brexit on growth and debt levels, with the Central Bank projections being the more pessimistic.
This graph – taken from the Fiscal Council’s recent fiscal assessment report – shows that the economy will avoid a recession, though the more pessimistic Central Bank projection shows growth crashing towards zero. Further, both projections show the economy bouncing back in a relatively short period, even higher than the baseline growth.
However, debt levels will take a hit compared to current projections – the baseline.
Under the ESRI projections, debt will top out in the first year of a hard Brexit and then start to decline. The Central Bank projections, however, are bleaker with debt still rising in 2023.
However, based on the trajectory of the deficit, even under the Central Bank projections, debt will start to fall after 2023.
What should be the response? First, it shouldn’t be what the Fiscal Council is tentatively suggesting:
‘A question worth considering is what level of adjustment to the structural primary balance would be required to stabilise the debt ratio. . . . Based on the [Fiscal Feedback] model, this could be achieved with a front-loaded adjustment of almost €4 billion in 2020 or with a cumulative adjustment of €5 billion phased evenly over the three years 2020–2022.’
This puts us back into pro-cyclical policy territory – taking money out of an economy that is already losing money.
The Government seems set to let the deficit rise without any fiscal response. This would be done in the expectation that the Brexit hit is temporary and that the economy will resume its upward trajectory. This is a more responsible approach.
But we can go further.
First, strengthen the economy’s ability to respond to the crisis by introducing pay-related unemployment benefit in the next budget. If jobs are lost (and this is highly likely) then, at least, ensure that affected households can retain most of their purchasing power. This would help maintain consumer demand and, so, keep businesses in business.
Second, introduce a net assets tax. This would have little impact on demand but would raise revenue to protect the deficit/debt line.
Third, establish sectoral committees across those sectors likely to be hit (e.g. food manufacturing and other UK-facing sectors) with employer and employee representatives.
Special measures for badly hit enterprises should be conditional on support from both groups – but especially employees. This, in effect, would establish sectoral collective bargaining and would ensure that everyone who is affected has a role in developing and overseeing the response.
Fourth, proceed with the carbon tax but return the revenue to households. A per capita payment would benefit average-to-low households and redistribute from the higher income groups. Not only would this be a tool for reducing inequality, it would boost demand during the downturn.
Fifth, take €2 to €4 billion from the Government’s substantial cash balances and invest it on a once-off basis into public housing construction – especially cost rental.
This would be all the more necessary if the Central Bank’s more pessimistic projections come to pass.
As well as addressing the housing emergency, this will create employment, raise revenue and reduce unemployment costs, and support the productive economy with lower rents.
And it wouldn’t impact on the debt (cash balances have already been borrowed).
And, finally, ditch the €3 billion tax-cut promise. Even in the best of times this would be folly; when the economy is suffering from a slow-down, this would be reckless.
Yes, we should be concerned about the debt. Therefore, we should be concerned to avoid pro-cyclical responses which will only embed high debt levels in the future. We need to avoid reactive and self-defeating policies.
Prudence knows no fear.
Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. His column appears here every Tuesday.