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budget 2015

If 13 cent of every €1 raised in taxes pays down debt what can be done to ease the burden?

In the run-up to Budget 2015, Dr Daragh McGreal looks at the issue of Ireland’s ‘unsustainable’ debt.

THERE ARE 51 days to the Budget with much debate still to take place between now and 14 October on what the government should spend and cutback on. 

In the third in a series of articles Dr Daragh McGreal, an economic advisor to the independent TD Stephen Donnelly, examines our country’s debt. 

Just over 150 years ago, on August 4th 1854, the Ottoman Empire took on its first official foreign loan to finance its role in the Crimean War.

The Empire had resisted this for years: it feared its agricultural base and poor tax collection system would mean the loans would not be repaid. But it needed money and it needed to win the war and so it began signing agreements with European bankers, assisted by their national governments.

The war was won in 1856, but the Empire never recovered from its reliance on foreign capital. European economists and bankers arrived and set up a huge bureaucracy to monitor the state’s finances.

But with the collapse of the Empire and the onset of World War 1 the debt was never paid in full. The last payment was made 100 years after the first loan, in 1954.

What has this got to do with Budget 2015? Well, we’re paddling in the same pool as the Ottomans. We have heard a lot over the past number of years about Irish debt.

As can be seen from the graph, there is good reason for this: between 2007 and 2013 general government debt more than quadrupled.

debt comparison

As this debt accumulated, some commentators said that it approached becoming ‘unsustainable’.

But what does unsustainable mean? And where is the limit?

In truth, there is no technical definition. But if it becomes so costly for a country to service its debt that it has little left to fund basic services, then it’s fair to say that the unsustainable limit has been passed. At that point you’ve become a forgotten empire.

In Ireland, the Department of Finance expects Ireland’s debt to fall to at least 107 per cent of GDP by 2018. This is not because borrowing will cease, but because it will grow at a slower pace than GDP.

So for our debt situation to get better, and to approach the levels seen in other EU countries, we are banking on strong economic growth.

But is this possible? After all, for every €1 we took in last year, 13c went on paying back the debt we owe. And although this will fall over the coming years, we’re still stuck for money to invest in the economy and means that growth will be stifled. This, in turn, means that the debt-to-GDP ratio will remain high.

Breaking this cycle of debt limiting growth is a difficult challenge.

So what are our options?

One possibility would be to swap our IMF loans with typical bond market loans, which are currently available at about half the interest rate of our IMF loans. Doing that would reduce our annual interest payments by a couple hundred million. This would need the go-ahead from other EU states so won’t happen overnight.

Alternatively, one measure for Budget 2015 could be to initiate a programme of ‘social impact bonds’. These are a relatively new and low risk concept.

They work like this: the government hires an intermediary to raise capital to solve specific social problems, such as homelessness or recidivism; the intermediary hires an expert voluntary organisation to run the project; depending on the success of the project and the savings to the state, a dividend is paid to the investor.

All parties have an interest in the project’s success and the state avoids more indebtedness. Think of it as philanthropy with a profit.

A final option is to default.

Recently, almost 150 years to the day since the Ottoman Empire’s first foreign loan, Argentina defaulted on a portion of its debt obligations. Those affected were bondholders who previously turned down a bond-restructuring plan.

For Argentina, which is currently experiencing a recession and high inflation, this may seem like a small victory. But how might it escape the recession if lending facilities dry up?

Argentina’s battle with debt has been going on for 13 years. The US struggled with debt throughout the 1840s. The Ottoman debt problem ran for almost 100 years. Japan has unspeakable debt problems. And Ireland will not see normal debt levels until at least the 2040s.

This all shows that there are two constants to national economies: debt and taxes. Learning to live with both is a frustrating necessity in Budget 2015.

Dr Daragh Mc Greal is an economist and human rights consultant currently working with Stephen Donnelly TD on Budget 2015 and other policies.

Poll: What would you do to tackle Ireland’s debt problem? 

Poll Results:

Swap IMF loans (1011)
Default (726)
Social impact bonds (274)

 The floor is yours. Let us know what you think in the comments… 

Read: Why do we pay more VAT on hairdressing than we do on greyhounds?

Read: There are just 66 days until the next Budget so let’s talk about how much we should cut

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