IN THE 1990s Irish officials started producing documents with titles like ‘What to do with the surpluses?’. This was an entirely new conundrum: they had no experience in dealing with the problems that come from success.
Left to their own devices, they might have done broadly the right thing and acted carefully, but the political system inevitably got in the way. According to the latest figures, the state is predicted to run a €10 billion surplus this year and €16 billion next year, a combined €26 billion.
This figure is enormous by any measure: the equivalent of ten National Children’s Hospitals or two and a half Dublin metros. So what should we do with it? Let’s start with the worst option and work upwards.
For anyone who remembers the millennial period this should all feel eerily familiar. Massive, unpredicted windfall taxes, mostly coming from one place, with sage voices warning that it could all evaporate at any moment.
The mistake then was making permanent current spending commitments and tax cuts. When the revenue disappeared and unemployment rocketed we were quickly left with annual deficits of over €20 billion.
While the cost of the bank bailouts was enormous, most of the national debt incurred during the crisis was accumulated in the years it took to close the deficit (see figure below). More current spending now would also undo the progress made in tackling inflation, storing up additional problems and prolonging the cost of living crisis.
A much better option is to invest the money into avenues that can provide a decent return, either here or abroad. Singapore – a country with much the same population as Ireland squeezed into a space smaller than Louth – has an estimated sovereign wealth fund of over $700 billion. This is among the largest in the world, alongside China and countries that literally struck oil. How did a tiny island state with no natural resources do it? It ran Budget surpluses consistently for 40 years.
Critics will argue that Singapore has gone too far with delayed gratification, an accusation which could not be levelled even by Ireland’s harshest critics.
We should never tire of the miracle of compound interest, or its policy implications. One of my favourite economics writers, Robert Frank, gives the hypothetical example of two families, each with the same starting income. One family saves 20% of its income a year while the other saves 5%. Both invest in mutual funds with a return of 10% a year. After thirteen years, the family saving 20% will actually have a higher living standard (because of returns on its savings), even while continuing to save at the same rate. The gap will continue to grow throughout their working lives. Even more importantly, it will retire with a lump sum four times the amount held by the second family.
The principle works exactly the same for countries: by saving and investing more now we could make permanent improvements in our living standards.
The most intuitive thing to do with the money is to build houses. Under normal circumstances, this would be entirely correct for both social and economic reasons. The issue, as officials are well aware, is an acute shortage of construction workers. Anyone who works in or is close to the industry will know that it is close to capacity.
More state spending would just push up prices, not output.
But this is to give up too easily. If the real problem is a capacity bottleneck then let’s spend our newfound (probably temporary) fortune on tackling it. Demographics suggest Ireland will have to build 50,000 houses a year for the next three decades, compared to the annual output of about 30,000 now. This can be framed as either an obstacle or an opportunity. We need to meet the demand we know will be there, which provides much-needed stability for the sector.
Again, Singapore provides some guidance here. It embarked on a massive building programme in the 1960s, turning to guest workers on temporary visas when it ran out of its own. We could also do much more to incentivise people into the sector. There is some movement here but it is far too incremental.
The political party that provides some real answers has the opportunity to offer much-needed hope at the next election. We were able to do the unthinkable during Covid, shutting down much of society for long tracts of time. The housing crisis needs to be treated with comparable urgency.
Ciarán Casey is an economics lecturer at the University of Limerick. He is the author of ‘The Irish Department of Finance, 1959-1999′ (IPA, 2022) and ‘Policy Failures and the Irish Economic Crisis’ (Palgrave MacMillan, 2018).
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