THE PROMISSORY NOTE deal will save us a tremendous amount from day to day spending over the coming years, with the Exchequer having an additional €1 billion in 2014 and 2015 respectively to play around with. Or, will it? Every special interest group in the country – some more deserving than others – will come looking for a slice of that cash; already careless government departments could eat it up in overspends; and there’s an argument to be made that we shouldn’t spend the money at all.
Minister Leo Varadkar made a very prescient statement when he pointed out during the week that the promissory note saving could be viewed as a billion less to borrow, rather than a billion more to spend. According to The Plan™ the government will need to borrow €11.2 billion in 2014 and €7.5 billion in 2015. €1 billion of that in each year was to pay debts that, thanks to the restructuring of the promissory note, are no longer due in full during these years.
The problem of interest
One of the major difficulties faced by Ireland in the coming years is paying interest on debts already accrued, the vast majority of which are in relation to daily government spending rather than banking debt. In 2014 and 2015 servicing our debts will eat up 16 per cent of the tax take. The argument Mr Varadkar and others put forward is that we should reduce our borrowing by €1 billion a year and save ourselves the interest payments in the long run, which is in accordance with the theories about our children paying off our debts that many opponents of the prom note deal remarked upon.
The question of how to ‘spend’ the money (or merely not borrow it) then becomes one of weighing up the opportunity costs of whatever programmes we could go ahead with versus the known cost of borrowing. Would a ‘stimulus’ of some sort kick-start growth in the economy that would deliver more benefit than the reduced cost of debt interest in years to come?
The money could be used to offset the fiscal consolidation required in the next few years. The Government is supposed to raise or cut an additional €3.1 billion in 2014 and €2 billion in 2015 to meet its targets. In 2014 €2 billion is spending cuts and €1.1 billion in new taxes; and in 2015 it’s to be €1.3 billion cut and €0.7 billion raised. Regular readers will know I’ve long been an advocate of something Fine Gael was convinced of pre-election from studies at Harvard University: that, in general, tax increases harm the economy twice as much as spending cuts.
In an era of consistently anaemic growth it is no economic question as to the damage year after year of tax increases has delivered to our country. The opportunity to tell the people of Ireland that there will be little and then no further tax increases from 2014; and perhaps even tax cuts in the foreseeable future would deliver a boost to confidence right now, in 2013. With confidence comes spending; with spending comes growth, the only real way to lead our country from this dark place our leaders have taken us.
More likely would be a hodgepodge of spending and tax proposals, carefully tailored towards the electoral needs of the European and local elections in 2014 and a general election in 2015 or early 2016. While these will deliver salve to some well deserving causes, they will not have the impact on the greater good from removing the drip-drip-drip effect of acid taxes on the structure of our economy.
In terms of a stimulus, you might recall (or be forgiven for not remembering) the ‘stimulus’ programme announced in the summer of last year. €2.25 billion to deliver 13,000 new jobs between then and 2018. A billion sounds like a lot, but in government make-work programmes it costs €170,000 to create a job putting band aids on the roads or building new school gymnasiums in electorally important areas.
A major worry about the fate of the money saved, and a subtext to Minister Varadkar’s statement, is that the Government will simply blow it all through unexpected cost overruns and a relaxation of reform in the public sector.
The departments of health and social protection ate up an additional billion in 2012 versus what they were allocated, with major failures to deliver savings in areas like drug payments and the trouble of stubbornly high unemployment contributing.
We’re nearing the apex of the Croke Park II talks, and while cuts to pay are fairly definite the other reforms and savings to be delivered require constant buy in and work from people at all levels of the organisation. As we’ve seen from the rather lethargic process of reform in merging many quangos and certain other reforms, when the public sector managers drag their heels they can take an awful lot out of the speed of reform.
Reluctance to change
From ministers to junior managers the knowledge that there is a billion of wiggle room on the table could promote further reluctance to change, and the Government will have to be even more vigilant now than it was previously when the targets were boiler plated and bolted down by the might of the troika. It’s a worry in general, that when they leave Ireland the mandarins will swiftly revert to previous form. The handling of the promissory note billion could be an early indication of how that will be managed.
It would be an awful waste to see the billion frittered away on some combination of public sector deterioration and constituency politicking. I’d rather just not borrow it than see ministers parading around marginal constituencies with chequebooks. I think we need to use the money decisively or not at all.
There’s half a year yet till the new early budget process begins. I daresay we’ll be hearing a lot about this billion.