SOMETIMES IT’S EASY to take for granted that I have a readership. With the general election in Ireland less than ten days away, though, now cannot be one of those times. The majority of the people who read this post will have a vote in next week’s election and some – probably many – are not only undecided about for whom to vote but also keen to learn more about the major issues.
Last December, a few of us economists got together and wondered what could we do to share what we think about Ireland’s economic circumstances and solutions to the problems Ireland faces. The result – after an awful lot of tidying up and de-jargoning – is thepeopleseconomy.com. It’s a store of knowledge, with a glossary explaining economic jargon, a set of questions to ask candidates, answers to economic FAQs and, over the course of this week and next, live web seminars for election candidates, where they can ask economists questions about different economic topics.
There is also a Youtube channel showing short videos on particular topics – an example is below.
A couple of months ago, I outlined my thinking about what sort of hole the Irish economy is in, how it got there and it can get out. Given the complex issues involved, it’s a relatively long post but hopefully it explains the key issues. I’m aware, though, that while economists can talk and talk, real people are busy with their lives.
So today, I’d like to pass on just two questions I’d recommend people ask their candidates, together with my own thoughts on both questions.
This is the obvious first question. As things stand, it looks like Ireland’s national debt will be about €50bn higher due to the consequences of the blanket guarantee given in late 2008 to Ireland’s banking liabilities. This is money pumped into banks as “recapitalisation”, i.e. closing the gap between a bank’s assets and its liabilities. There is another way of closing this gap, though: instead of increasing the banks’ assets, you can reduce their liabilities.
Putting all the pain on Ireland’s taxpayers is not a fair solution, as they didn’t take this risk to begin with. It’s also clear that, given Ireland’s high non-banking debt, it’s not a feasible solution. The ideal would be to share the pain with those that took the risk to begin with.
There are two problems with that: firstly, a large chunk of bondholders have got out of Irish banks already. Secondly, the EU is not interested in that solution anyway and has done two things to prevent that from happening. It has stuffed Irish banks full of deposits (through the ECB). And, through the IMF-EU loan, it lent lots of money to the Irish government so that it can go on recapitalising at will.
Ireland is now stuck. The EU is concerned about not burning bondholders, but the markets are concerned about Ireland’s overall debt levels. Given all that, there is one elegant and in my opinion obvious solution. It is the EU – not Ireland – that is concerned about not making the bondholders pay. The EU has gone off to markets and borrowed to lend to Ireland to do this. If it so concerned, all it needs to do is make those funds available to Ireland at the rate it borrowed at. This is closer to 3% than 6% and would effectively mean “burning bondholders” by 50% domestically, while allowing the EU to protect senior bondholders.
Unfortunately, much as I would like it not to be, the first question is auction politics. It is easy and popular to come out with increasingly strong rhetoric on “burning the bondholders”. I cannot stress enough, though, that in terms of the IMF having to be called in, Ireland’s banking problems only tipped us over the edge: we were already dangerously close to the precipice anyway.
Therefore, the second question is all about not hiding behind the failure of the Irish banking system. We, the Irish people, voted in governments who promised to tax less and spend more. They did this and now we are left with the largest gap between government spending and government revenues in the developed world. No amount of burning bank bondholders can change that.
The chart below shows the per-month tax bill for the typical household in Ireland, in a balanced-budget scenario. It’s a combined VAT-excise-income tax bill and assumes a 6% interest rate on Ireland’s national debt, which includes an irreversible €50bn due to the banking crisis. The banking debt is significant but it is much less than half Ireland’s non-banking debt and – in per-month terms – only about one twentieth the size of the Government’s current expenditure.
Monthly tax bill for the average Irish household, by item of expenditure
Ireland has a huge deficit to close. The only ways to close this are by more taxation and by cutting current spending. No-one wants to do this, but we have overspent and under-taxed for the past decade. The kind of answers I would like to hear from a candidate will be familiar to long-standing readers of this blog – a top five might read:
Thanks for reading this, and please vote if you can.
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