Monday 26 September 2016

Borrowing for everyday spending has become a hard habit to break

Published 22/09/2016 | 02:30

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When times are good, it makes sense to salt something away. Times aren't always good. After the past eight years, nobody disputes that.

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When bad times come, having some savings to fall back on makes life less difficult. It also means less disruption.

Running countries' finances and running household budgets differ in some significant ways, but in both cases prudence is important. If you want to avoid a shock - in personal life or in national life - having a cash cushion is wise.

With the date for Budget 2017 finally set - it will be unveiled two weeks from next Tuesday - consideration of money matters will likely dominate the national discourse for much of the next month. Most of the discussion will focus on who gets what.

Finance Minister Michael Noonan moved earlier this week to lower everyone's expectations, saying that nobody will be cheering from the rafters after his budget speech. This all sounds prudent.

But Mr Noonan has a record of sounding more prudent than he acts.

In recent years, he has managed to find clever ways around the (many) rules that bind him. He has done so in order to dispense more on budget day than he had originally flagged. The mantra he used to keep the troika happy - under-promise and over-deliver - is also how he has tried to woo the electorate.

This has all been designed to cheer people up by 'giving back' more to taxpayers and those dependent on the State in various ways. But you can't give back what you don't have.

This year, the Government's latest figures show that it will spend €2bn more than it takes in. It has to borrow to make up the difference. The amounts are not trifling. Bridging the gap amounts to an additional €1,000 borrowed this year for every person at work in the country.

When one considers the size of the national debt mountain, this is worrying. The Government is keeping up its borrowing habit despite its accumulated debts from all previous years amounting to more than €100,000 per worker.

Nor is the borrowing habit about to change. As per the Government's latest sums, the plan is to remain in the red next year. Only in 2018 does the current administration plan to balance the State's books. Given that its chances of still being in office by then are limited, that plan doesn't count for much.

All this puts Ireland in a very vulnerable position. If you can't make ends meet in the good times, you will be in real trouble when times turn bad. One doesn't need to be an economist to know that a weakening economy will send the public finances deeper into the red, as more people come to depend on the State and fewer people pay into its coffers.

If that happens, it will be straight back to austerity budgets. And because small, open economies, such as ours, are more volatile than bigger, more closed ones, the risks of things going badly wrong are ever present.

That is not, I hasten to add, to predict a slump in the near term; the economy has plenty of momentum and will almost certainly continue to grow well into next year. But as economists cannot forecast much beyond a six-month time horizon with any accuracy, it is incumbent on governments to be prepared for every eventuality.

The best way to avoid another bout of austerity is for the public finances to be in the black when the economy is growing, as it has been for the best part of four years. In this regard, we can learn from some other small, open economies which have learnt lessons from their own painful slumps.

In the 1990s, Finland and Sweden had brutal recessions not dissimilar to Ireland's after 2008 and have since been prudent with their public finances. Denmark avoided the deep slumps its neighbours suffered in the 1990s, but learnt lessons nonetheless.

In the middle of the last decade, when Ireland was in the middle of its property bubble, these three countries were enjoying decent economic growth, albeit nothing on the scale of Ireland's boom. While the then government here only just about managed to keep the public finances in the black (despite massive tax surges), our Nordic cousins were prudently spending much less than they were taking in.

On the eve of the crisis in 2007, for instance, the Irish government had a budget surplus to the tune of 0.3pc of GDP. Sweden's surplus was 11 times bigger, at 3.3pc of GDP. The Danes had a buffer 17 times bigger, at 5pc. The prudent Finns were running a surplus slightly larger again, of 5.1pc of their GDP.

They all suffered when the Great Recession struck in 2008, but none had to endure as much austerity as Ireland and none come close to having to seek a humiliating bailout. Good economics usually makes for good politics. So it is in managing the public finances. That's because people give little thanks to politicians when things go well, but heap lots of blame on them when times are hard.

If there has to be a return to austerity over the medium term, there will be hell to pay. The best way to avoid that is to do what the Nordics do when times are good - get out of the red and into the black.

Irish Independent

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