THIS YEAR, I was lucky enough to be asked to speak to the Parnell Summer School, whose theme – on the 100th anniversary of the Home Rule Bill – was “Sovereignty and Society”. Both are topics, in my opinion, that are misunderstood and misrepresented in national debate. Over the last months and years, we have heard a lot about the concept of economic sovereignty but, to me, the concept of economic sovereignty is one that is significantly over-valued, while that of society is under-valued.

People happily cede sovereignty all the time to give themselves a better future. No-one tries to build their own home or produce all their own food. They pool their sovereignty in a community where these tasks are shared and so are better done. Perhaps a clearer analogy is when an individual borrows to further their education or a household borrows to buy a new home. These are decisions that immediately subject that person or family to scrutiny, in relation to spending and lifestyle patterns and plans for the future.

A lender has taken some of the borrower’s ‘sovereignty’ – and yet, the borrower is happy to pay that price, because they want a better future. And if you put yourself in the shoes of the saver, giving your hard-earned savings over to someone else, it’s not hard to see why saver-lenders want this scrutiny.

This works at the level of the country, too. No country has ever provided a high standard of living for its citizens by abstaining from investing in its future, and investment involves large-scale borrowing. So, as soon as we want what’s best for our community, straight away we should be prepared to yield some of our ‘independence’ to deliver it.

Quite why there is such a fuss about lost sovereignty because Ireland is currently borrowing from ‘our mates’ (the other countries that make up the EU and IMF) at preferential rates, rather than borrowing from the international capital markets is beyond me. No matter who we borrow from, mates or markets, we will need to have a fiscally responsible set-up for them to do so. And the Irish Government spending €20bn more than it takes in in revenues is not fiscally responsible by anyone’s measure. The tough budgetary measures we will endure from 2008 until at least 2016 are the result of our own mistakes, not any lost sovereignty.

Cuts and benefits

In relation to society, it’s my firm belief that policy-making in Ireland – and indeed in most countries – systematically under-values society, which comprises market and non-market activities.

Non-market activities are sometimes free (friends and family, for example), often not (roads, coastguards and primary education cost resources, for example) but inevitably, they are not included when we take stock on an annual basis.

This is not to suggest for a minute that we should scrap GDP and measure happiness instead. This would be to subject public policy to the vagaries of human sentiment, vagaries that are only just being understood by behavioural economists and psychologists. Instead of scrapping using dollars and cents to guide our decisions, we should simply extend the principle of GDP to include non-market activities. After all, “priceless” to an accountant means zero. Let’s replace those zeros with numbers. They may not be measured with precision, but then neither is GDP – and understanding roughly the benefit we get from society will help us get the balance between market and non-market activities better.

The related issue with how society divides out its resources is the lack of any connection between how money is raised (in large pools such as VAT, income tax and PRSI) and how money is spent (in large pools such as health, education and social welfare). Thus when spending cuts have to be made, they are only ever done in reference to the costs of a particular public service, never its benefits.

Changing these resource allocation decisions so that they are based on the return enjoyed by society on money spent – and not just on the amounts spent – is the single biggest challenge for public finances in the OECD over the next generation, in my opinion. And there is no reason Ireland can’t be at the forefront in developing proper accounts for public spending.

So perhaps we should stop worrying so much about economic sovereignty, and start thinking seriously instead about how we measure the benefits of our spending – wherever the money is raised, or borrowed, from.

This opinion piece is adapted from a post on Ronan’s blog available here and his address to the Parnell Summer School, slides available here.

Ronan Lyons is an Irish economist based at Oxford University, and runs the Economic Research unit at Daft.ie. You can read more articles on his blog.