Sunday 24 February 2019

David Chance: 'We can't let our debt cast a shadow over need for more inclusive growth'

The billions of euro from multinationals contributed to a tangible budget surplus. Stock image
The billions of euro from multinationals contributed to a tangible budget surplus. Stock image

David Chance

It is time to stop fretting about the debt. To be sure, €200bn is a very large number - and when you divide it up among the people living here it comes out as €42,000 per person. That's an eye-watering number and - in a country where average annual wages before tax are €46,402, based on Central Statistics Office data for 2017 - a scary one. That's because it implies that if creditors came calling for all the money Ireland owed them, we, individually, would all be broke.

It is just as well that is not the way government finances work.

Yes, excessive debt creation through tax cuts and overspending of the kind we saw in the run-up to the crisis is not to be welcomed. But the Government is not constrained by the kind of shopping-list economics once espoused by former British Prime Minister Margaret Thatcher.

We need to realise that the headline number is not going to shrink very much at all over the coming years, but we should also realise that the number itself is not the most important thing. It is the ratio to the size of the economy, whether measured by Gross Domestic Product (GDP) or some variation of Gross National Income (GNI).

We have already undergone the fastest and most dramatic turnaround in its financial position of any country since the financial crisis hit, and the State also has other duties that should now be coming to the forefront of fiscal policy, relating to reducing chronic levels of inequality and lack of opportunity here.

Come the next economic downturn or even recession, it is the government alone that will be able to provide the firepower to help turn it around as the European Central Bank is not going to start setting policy for the 4.8 million people on this green speck in the Atlantic.

Even if it wanted to, it simply doesn't have the firepower.

On average, nominal interest rates - those before taking inflation into account - have been cut by 5.5 percentage points in the euro area since 1970, according to a publication this week by the National Bureau for Economic Research that was authored by, among others, former US Treasury Secretary Larry Summers, who is now at Harvard.

With the ECB's rate on bank overnight deposits, which is currently its primary interest-rate tool, remaining at minus 0.40pc, any stimulus provided by the central bank would take interest rates even deeper into negative territory.

So that leaves Ireland. And a look at where we have come from shows that we do have some fiscal space.

In 2010, the budget deficit - after recognising the liabilities from the financial sector - was almost a third of the nation's economic output.

Now, thanks to a stellar economic growth and a huge helping hand from tax payments by multinational companies, Ireland ended last year with a small budget surplus.

Analysis from the Department of Finance shows that a one-off hit to economic growth of 3.5 percentage points versus their forecasts would result in the ratio of debt to Gross National Income being 25 percentage points higher by say 2025 than otherwise.

Crucially, however, it would still be on a downward path. And we would remain within the constraints of the Stability and Growth Pact rules, even if they are miscalibrated for Ireland due to the impact of the operations of foreign multinationals here.

It is not as if all those billions of euro from the multinationals that are flooding into government coffers do not exist. They do, and yes there is a risk they may dry up, but it is real money and the State had a real budget surplus last year for the first time in 12 years.

You don't have to learn to love the nation's debt and you don't have to just take my word for it.

Former International Monetary Fund Chief Economist Olivier Blanchard sent shockwaves through the economic community when he spoke this week at the American Economic Association and said that warnings over high indebtedness among rich nations were overdone.

Blanchard, one of the world's most respected economists, argued that as safe interest rates were expected to remain low for a long time, the issuance of debt without a later increase in taxes may well be feasible.

"What do I want you to go away with? Not the notion that debt is good, but that debt might not be so bad," Blanchard said.

He was, of course, speaking about the United States where a surge in debt thanks to President Donald Trump's tax cuts has pushed the public debt-to-gross domestic product ratio to around 88pc.

But the same argument applies here. The yield on 10-year government bond is around 0.90pc. It is projected by the Organisation for Economic Cooperation and Development to be 1.4pc in 2020.

Even the most pessimistic official growth forecast for Ireland in 2020, which is about as far out as economists can really see, is 3.4pc from the OECD, so the same argument that Blanchard makes for the United States also applies here.

Don't forget, the State's debt as a percentage of GNI* has already fallen by a whopping 55pc points from its peak in 2012 and stood at 111pc of GNI at the end of 2017.

That so-called 'fiscal consolidation' was achieved at huge cost, which mainly fell on the poorest in society. A continued fetishisation of debt levels will see them again bear the costs of cuts.

The percentage of people at risk of poverty in Ireland remains elevated by the standards of other wealthy European Union nations. Even though it has fallen sharply since the recession, it still stands at 15.7pc.

The vulnerabilities of society were neatly illustrated in this week's unemployment numbers, which showed that the percentage of people out of work had fallen to pre-recession lows.

Despite this, the gains have not been uniformly spread and the youth unemployment rate remains elevated at 12.2pc.

According to Tasc, a think tank focused on economic inequality, our proportion of low-paid jobs is 24pc, double the rate of other small, open economies in the European Union and 10pc points above the European Union-15 average.

After the austerity years, the budget needs to focus on access to decent housing and health for all as well as providing training for young people who are excluded from the labour market.

Finance Minister Paschal Donohoe has already moved to shore up government revenues with the ending of a Vat exemption for the hospitality industry that had cost the state €2.6bn to the end of 2017.

He says he has plans for more changes in the tax regime.

What is also interesting is that Mr Donohoe recently wrote a review of a book by economist Paul Collier called 'The Future of Capitalism' which discussed widening inequality. That suggests that Mr Donohoe is well aware of the issues confronting Ireland and the need for a more inclusive growth model.

Hopefully he will use his stewardship of government finances to deliver.

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