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Dublin: 13 °C Tuesday 19 March, 2019
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Column: Will the young pay for the sins of the old under the promissory note deal?

The restructured debt obligation will give the Government fiscal space and breathing room. Whether this benefits the young depends on what they do with that time, writes Sam Brazys.

Samuel Brazys

AS EXPLORED BY the BBC, the young have never had it as bad as they currently do. Despite the unprecedented prosperity of the sixty years following World War II, the baby-boomer generation are leaving their children a legacy of debt, unemployment and economic uncertainty.

Sixty years of comparatively loose monetary and fiscal policy combined with extravagant social guarantees have fuelled self-fulfilling asset bubbles. These have enabled the baby-boomers to accumulate wealth far beyond the contribution of their productivity. Debt-financed government and personal consumption became the norm and official debt-to-GDP ratios steadily marched into previously untouched territory with government debt at 40, 50, 70 and 100 per cent of GDP. This not only came to be viewed as sustainable, but as perfectly reasonable.

The downturn

When the piper finally came to call in 2008, Western governments responded either by further flooding the market with liquidity (United States) or by making outlandish guarantees (Ireland) and imposing broad-reaching austerity in order to ensure that those who held wealth kept it. While these measures almost certainly staved off total economic collapse and depression – because of the way they were implemented – they represented one of the greatest inter-generational screw-jobs of all time.

Increases in regressive taxes like VAT have impacted on young people, as they spend a far greater proportion of their income than older people. Entry-level hiring freezes have affected youth unemployment rates and disproportionally impacted the young. Loose fiscal and monetary policy – “spending our way out of the crisis” – will cause inflationary pressure that will most-likely rear its ugly head right about the time that the current job-seeking generation is actually starting to accumulate wealth (and paying for the funerals of their baby-boomer parents). Under current policies the young will pay for the sins of the old.

So does the liquidation of the IBRC and the transformation of the promissory note do anything to address the inter-generational injustice? First, by converting the notes to sovereign debt the possibility of a write-down essentially disappears, while “burning the bondholders” doesn’t necessarily mean what people think it means. It’s not just eating the rich, as lots of “ordinary folk” have stakes in financial assets too – either directly or indirectly through pension funds. Bond default may have been a way to “eat the old” as few young people are fortunate enough to have significant interests in pension funds or personal assets to invest in markets.

Passing it on

Unfortunately, even in this instance burning the bondholders may, on balance, harm the young, as a default (sovereign or not) would lead to a substantial negative market reaction, significantly jeopardising the economic recovery and any prospect for job growth at all. Additionally, to the extent that parents transfer wealth to their children, reducing the parents’ wealth does not necessarily make the children better off.

The second aspect of the note-transformation is the touting point of the Government. By deferring the payment, the debt-burden may ultimately be less, as inflation reduces the real value of the debt over time. This may well happen. This is in essence a partial-default, but one that is down the road such that the current bond-holders won’t feel it and may be dead by the time the losses are realised. In the immediate term, the restructured debt obligation will give the Government fiscal space. Whether this benefits the young depends on what the Government does with its breathing room.

Using the time wisely

If it uses the increased budgetary flexibility to protect social payments, salaries and other transfers to the baby-boomers, such as maintaining no means-testing of pensions and child-benefits or outlandish senior public-sector salaries, then the screw-job has just been deferred and the young will eventually pay.

If, instead, the Government uses the flexibility to place the burden of austerity and adjustment on the old by means-testing benefits, increasing pension ages and requesting full economic costing from senior public-sector workers, while providing stimulus for the young like facilitating entry-level hiring, providing job-creation incentives and protecting education expenditure, then the young may avoid performing the penance for the old.

This is a nice dream for those that are young – but given the demographics of both those that vote and those that serve in office – a dream may be all it remains.

Samuel Brazys is lecturer of International Relations at the University College Dublin. This post was first published in Political Science in Ireland.

Read: As it happened: Dáil approves Bill to liquidate IBRC>

Read: Kenny: First payment on new Government bonds in 2038>

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