Blaming the bankers won't fill the void between taxes and spending
It has become clear that there is something wrong with the way this country is governed
Thursday March 12 2009
A curious notion gaining widespread belief is that the misery to be inflicted upon us in a few weeks' time is the fault of the bankers. Or even more bizarrely, that it is the fault of a few rogue bankers breaking the law.
This is highly convenient for those who should perhaps shoulder the blame, but it is stuff and nonsense. Next month's budget dramas will attempt to deal with the fiscal crisis. Fiscal policy is not the responsibility of bankers, honest or dishonest. It is the responsibility of government.
Not that the question of who is to blame will put an extra cent in our pockets. (Or, rather, prevent an extra cent being removed from them). But if the public gets the wrong idea about how the country came to this sorry pass, it may make future fiscal disasters more likely. After two of them in 30 years, it is abundantly clear that there is something intrinsically wrong with the way Ireland is governed.
Getting the wrong idea may also, paradoxically, make it harder to deliver the corrective measures. It is already a mantra that those who earned the great wealth in the boom, or contributed to the crash, should pay the cost.
It is true that the crisis is tied in with the folly of the banks, the weakness of the regulation system, and the failure of the global authorities. That last produced the global credit bubble, which the first two further inflated with world-beating enthusiasm, alongside an unprecedented, government-sponsored construction bubble. The bursting of three bubbles -- global, Irish banking and Irish construction -- explains why our situation is so much worse than that of most developed economies.
But the true number of bubbles is four. There was a fiscal one as well. For proof of that, one need look only to Spain -- the only other EU-15 country with a building boom to rival Ireland's.
Yawning chasm
In some respects, Spain's position is worse; its dealings with the rest of the world are in deficit to the tune of 10pc of GDP and its unemployment is approaching 20pc. But its budget deficit last year was just 3.6pc of GDP, compared with Ireland's 5.5pc. This year, the difference will be a yawning chasm.
Like the central bank of Spain, the Spanish government recognised the temporary nature of the property and building boom. The former insisted, in defiance of stupid international accounting rules, that its banks make provisions for future losses. The latter ran genuinely large budget surpluses.
Our Government spent the money. It was a Green minister who pointed out at the weekend that public spending rose by 50pc in the five years of the bubble. Last week, the Taoiseach in those years, Bertie Ahern, stoutly defended his approach and pointed to budget surpluses in 10 of his 11 budgets.
His key points, in a speech to an industrial relations conference in UCD, were that 80pc of the current spending in the 10 years of his tenure had been allocated to health, education and social support, while national debt was halved because of budget surpluses.
He neglected to mention more than doubling public spending during the period. Such permanent commitments need permanent taxation to pay for them. Surpluses are for dealing with the inevitable periodic economic shocks.
The banks and their regulators have given us the mother of all shocks. The global crunch would have wiped out the Irish surpluses on its own and the national debt would have begun to rise. But it is the failure to match taxes with spending which have brought the country to the edge of ruin.
The fact is that the electorate would not have tolerated a doubling in public spending if it had been asked to pay for it -- however laudable Mr Ahern's objectives. Property taxes paid for it instead. So we find ourselves in a situation where public spending reached 45pc of national income (GNP) last year. This is in line with the highest-spending, highest-taxed countries in the EU.
Needless to say, the actual public services are nothing like those available in those other countries. The other difference is that we remain one of the lowest-taxed countries in the EU. Only for a few more months, though.
Tax revenues
OECD figures show tax revenues last year at 38pc of national income. We will generously allow the Government to borrow 5pc of GNP for capital spending. That still leaves a gap of 8pc of GNP, which is €12bn in ready money, between taxes raised and money spent. This has nothing to do with the bankers or the global recession. It is entirely down to Mr Ahern's administration.
Using admittedly crude arithmetic, if it had not been so, the deficit now might be around 7pc of GNP. Which is about what one would expect from the construction crash and global crunch. Still pretty nasty, but it would not leave Ireland hanging on a limb by itself while the financial markets busily set about chopping it off.
Still, Mr Ahern achieved his objectives, if not the results he might have desired. There seems no possibility that public spending will fall significantly. It is a one-way ratchet. Indeed, unless spending is frozen in money terms, as the economy shrinks the cost of government will soon approach the 50pc of national income of Denmark -- the world's most heavily taxed country-- without, of course, becoming Denmark, one of the most successful economies on the planet, as well as the most equal and socially protected.
This nightmare scenario of an Ireland with some of the highest taxes and some of the worst public services is one reason why so many commentators think the Government is heading down the wrong road, and must concentrate on promoting growth rather than curbing the deficit.
But growth, even in the unlikely event that it could be achieved before a global recovery, deals only with the "cyclical" bit of the deficit caused by the crash. It cannot deal with the €12bn mismatch between taxes and the cost of running the country. Either we take a slash hook to those costs, or we pay the taxes and -- one would hope -- insist upon Danish levels of service in return.
- Brendan Keenan
