Wednesday 20 September 2017

State's €3bn AIB payday must make us face up to reality of €200bn national debt

Finance Minister Michael Noonan is expected to launch an IPO of AIB shares soon, with conflicting views on how best to spend it overshadowed by debt
Finance Minister Michael Noonan is expected to launch an IPO of AIB shares soon, with conflicting views on how best to spend it overshadowed by debt
Richard Curran

Richard Curran

There is nothing like the promise of big lump of cash falling into the exchequer coffers to get a good row going. With Michael Noonan expected to fire the starting gun on an IPO at AIB very soon, there is a mouth-watering prospect of the state landing a €3bn payday by selling an initial 25pc stake.

The money is already ear-marked to go towards paying down a little of our €200bn national debt. Those who believe the money would be better spent on investing in the economy, building affordable houses or plugging other such gaps, are coming at it from different perspectives.

As expected, the European Commission said this week that it should be used to pay down national debt.

Meanwhile, on the Left, there is the Labour Party and the trade union organisations like Siptu and ICTU, who have said that at a time of crisis in the housing sector, the money should be spent there. And you can see their point.

Others, even from within the business community, believe the AIB €3bn is just a drop in the national debt ocean and could be put to more productive use elsewhere. They also make a valid point, that at a time when raising money on the bond market is so cheap, why is there such an urgency paying down some of that debt.

In fact, countries rarely ever pay down their national debt, but try to make it proportionately less or at least more manageable through inflation and by growing the economy.

There is no doubt that €3bn could be put to very good use elsewhere right now, but would it? How would it be spent?

There is also a false sense in the debate about how the national debt is no longer seen as a crisis. It is almost as if the national debt has disappeared from view because it is somehow sorted. It has become easy to forget the threat our enormous national debt poses to our future prosperity.

Last year we spent €6.7bn in interest payments just servicing that debt. That is about one eighth of our tax revenues. Yes raising money on international bond markets is relatively cheap right now, but the NTMA has to carefully manage how often it goes to that well. It won't be this cheap forever and when it rises, so too will our interest bill.

For example, between now and the end of 2020 we have to re-finance €56.2bn of debt. This means we have to either raise that much in new borrowings to pay off older bonds which fall due, or we have to convince those holding that debt to exchange it for new bonds.

That does not include the €9bn to €13bn the NTMA plans to borrow this year. It has already raised around €7bn in the markets since January.

Not all of that borrowing is simply re-financing existing debt either. Our borrowing requirement for this year is expected to be about €2.1bn.

So, taking the €3bn from AIB, would allow the State not to have to borrow more money for just one year and have about €900m to spare.

This debate is really about how our national debt appears, in the national psyche, to be solved. No longer a problem. Sorted.

Unfortunately, it isn't. Ten years ago our national debt was €39bn. Now it is five times that amount. We have the second-highest level of national debt per person in the world, after Japan.

Equally, if global financial markets change, and our tax receipts are badly affected by Brexit, new Corporation Tax rules in the US, or other events, we may need to go back to the well of bond markets for a lot more than €2.1bn of new borrowing in the future.

One of our greatest fiscal difficulties is not sticking to the plan. We only stick to the plan when it is someone else's plan and we are forced to do it. When left to our own devices, our political leaders abandon the plan if financial circumstances allow.

Perhaps the hardest part of all for people to take, is the fact that we are not allowed under EU fiscal rules to use the money for anything else. We have given commitments around our fiscal plan and the rules do not allow Ireland to spend in this way.

Naturally, a case could be made in Brussels for an exception, but Michael Noonan indicated earlier in the week, ahead of his visit to the European Investment Bank on Wednesday, that even the potential whirlwind of Brexit won't be enough to support a case for making an exception in Brussels.

Those who would like to see the AIB €3bn used to solve the housing crisis, and it is an understandable reaction, have to ask themselves is it really a lack of money that is causing the housing crisis? Or is it a raft of other things that have made the housing market dysfunctional in the first place, which has hamstrung the ability to get houses built quickly.

This issue of what to do about windfalls will arise again because other big paydays are coming. For example, AIB has already paid €6.6bn in fees, share buy-backs and purchase of preference shares to the State in the last few years. I suppose an obvious question is where did that money go and why was it not raised as an issue before?

Nama looks set to make a profit of close to €3bn when it winds down. How will that money be used? Surely it would be a better argument if Nama didn't make that profit but instead ensured that an additional €3bn went into fixing the housing crisis. But Nama was ostensibly set up as an off-balance commercial sheet vehicle that is charged with making a profit.

It can't deliberately lose money to fix the housing crisis.

When the liquidation of IBRC is complete, there could be up to €1.1bn in returns to the State there. We are still paying the €28bn cost of bailing out the former Anglo Irish Bank but around €270m in dividends from the liquidators was paid to the State in January. What was that money used for?

There is a very serious issue coming down the tracks for government and the housing crisis is just one part of it. We will have to invest a lot more than is currently planned in developing new infrastructure.

Our population is growing and ageing. We have under-invested in hospitals, schools, our universities our transport infrastructure and don't even mention water.

Employers group Ibec has highlighted this problem, so too has the Construction Industry Federation and even trade unions are in agreement about the problems we are storing up for the future in this regard.

It is far from clear where the additional money will be found to fund these socially and economically important projects. Never mind the promised tax cuts from Leo Varadkar and how they are supposed to be funded.

The frustrating thing for people is how the AIB windfall represents another €3bn coming into the Exchequer they feel they cannot get. It must go towards national debt and picking up the pieces of the crash. Add to it the €13bn Apple tax bill that we can't collect either because it is the Government position that it isn't our money.

With the public service pay talks under way, the defining themes of the next three years won't just be Brexit but also how we spend the limited resources available across ever-competing demands.

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