ONE of the many great things about teaching an economics course is that you get as many ideas from your students as you give them. The other night, one of my students, who is returning to economics out of general interest but who has a wealth of experience in turning companies around, explained what he thought the budget strategy must be in the context of turning a company around from bankruptcy.
He said that the strategy must be one where the Government is getting its house of cards sorted in order to be able to default, not in order to be able to pay its huge debts. This is precisely the opposite of what is being articulated by the State. The State's central policy, continued today, is that we will get our budget deficit down to zero in order to be able to borrow again and add to the national debt. But for this businessman, the message should be the opposite.
Here is the thinking that underlies his conclusion. A few years ago, he and his team were called into a company that was going nowhere. Initially, they thought the problem was in the profit-and-loss account (P&L), the ongoing day-to-day business.
Looking at the P&L, they went about what they normally did. They found fat and waste and tried to cut it back while at the same time they tried to see which business lines were profitable and which ones could be beefed up in order to generate most revenue. They looked at the day-to-day running of the business and gradually began to turn the ship around.
But there was still a problem. It was an enormous legacy debt, which the previous management had undertaken in better times in order to expand. They had been aware of this huge debt when they first went into the company but knew that they could only deal with creditors once they had cleaned up the P&L. Once they had turned the company around, they set about phase two of the recovery strategy. They called the creditors in and announced that the company would have to default on its legacy debts because it couldn't carry them.
The importance of getting the P&L right was to prove that the company had a future. Now that they had done that they could cement the future by forcing the old creditors into realising that the new company would sink if it carried all the debt. They defaulted on all the debt. They calculated that if they were going to improve the balance sheet by defaulting they might as well do it spectacularly.
The company is now flying because, after all, you make a balance sheet that is crippled with too much debt better by less debt not more debt and if you can't service all the legacy debt it just won't be paid. This is not an issue of choice but an issue of the cruel, hard logic of capitalism.
NOW consider what our Government's strategy, or at least announced strategy is. We will grind the P&L into shape by balancing our budget in order to borrow yet more and add to the already enormous odious legacy debt. This is precisely the opposite of what a company would be doing.
It will not make the country better off but worse off because more and more future revenue will be going to pay past debts. We will be back to the crazy notion of borrowing from tomorrow not to pay for today but for yesterday and all the sacrifices that we are making now will not buy us any debt relief.
In short, unlike the private company, there is no reward for fixing the P&L.
So even if you are an "austerian" and believe in austerity, you must have an idea as to why you are doing it. There is a horrible feeling that there is no plan in Ireland. We are not imposing austerity in order to reduce our debt burden once and for all but we seem to be imposing austerity in order to lumber our children with yet more debt.
This is why today's Budget and the last five budgets appear to be the triumph of tactics over strategy.
We have no idea why we are doing it. There is no growth strategy tomorrow, which will be triggered by the "successful" implementation of austerity today.
If this were a corporate restructuring, the P&L tactic would be allied with a related balance sheet tactic.
This is not happening in Ireland. In fact, something much more bizarre is going on. We are supposedly trying to fix the P&L not in order to reduce our overall debt position, but to increase it!
David McWilliams' new book 'The Good Room' is out now