# We are still borrowing to run the country!



## Brendan Burgess (7 May 2018)

A good article here by Dan O'Brien 

*Our public debt levels are still growing, even in the midst of these good times*

I had not realised the full extent of this. 

In 2017, the Government borrowed €1,000 more than we took in.
For 2018, the Government's forecast is for a deficit of €800m instead of the budgeted surplus of €500m
We also expect a deficit of €350m for 2019. (But I assume that the Budget will take care of this?) 

This is despite three big developments 

Receipts from Corporation Tax way ahead of expectations
Much lower than expected debt servicing costs
Very strong economic growth

_In 2000, the economy was booming and tax receipts were pouring in. The then government ran a surplus in that year of 4.5pc of GDP. It then ramped up spending, which coincided with a slowdown in economic growth in Ireland and internationally. By 2002 the public finances were in the red. 


A swing in the budget balance of 5.4 percentage points took place in just two years. If that happened now Ireland would be running a deficit of almost 6pc in 2020. Such an imbalance would be twice the size of the deficits permitted under the EU's budgetary rules. 


That would provoke Brussels' wrath and necessitate the sort of fiscal tightening which would be exactly what a slowing economy would not need. 

_
*But even more seriously it would quickly raise fresh questions about the State's solvency. *


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## odyssey06 (7 May 2018)

And what have we got to show for it!


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## Firefly (8 May 2018)

Brendan Burgess said:


> A good article here by Dan O'Brien



I remember giving out about the level of borrowing by the Irish government post 2008 and some posters on here say things like "That's what governments do, they borrow". Well we certainly did! People talk about the horrible austerity we endured post 2008, but we actually inflated our economy like never before. And we are now stuck paying it back. Even with the extremely low interest rates due to QE we are still paying back 16.5 million per day just servicing our debt! https://www.irishtimes.com/business...-a-day-in-interest-on-national-debt-1.3434158 That's 6bn per year in interest payments....imagine what we could do with that money? The public sector are looking for pay parity for new entrants. The figure thrown about is 200m. That's 12 day's interest payments!

And that's not even paying down the principle. It was also argued that the borrowing could be justified depending on the ratio to output. Well, when QE finishes and Brexit happens, we are going to see how we fare then with the inevitable slowdown in the economy.

All of this points to a sick, core economic policy we are blessed with here.....pro-cyclical economics. When the economy is in the doldrums we borrow to spend and when the economy is doing well we continue to borrow to spend because we can afford the repayments.
Imagine running a business like that? It wouldn't be around for long!


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## shweeney (9 May 2018)

AFAIK it's still a hangover from the bailout. The amount being borrowed is reducing, but pay restoration and the ramping up of spending as the economy improves means it can only be reduced by so much each year. On the positive side new borrowing is at peppercorn rates and the bailout debts are being refinanced at the same low rates. This is my understanding of it anyway.


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## TheBigShort (9 May 2018)

He makes a two shrewd observations, but then fails to inquire or elaborate further.

The first is the 'unexpected' CT windfall? It surprises me that these companies don't have forecasts of their own that would indicate how much they expect to earn/tax to pay? 2017 was a year when the spotlight (albeit, too briefly) was shining on CT. Not just in Ireland, but across the globe. I'm wondering if there are indicators from ECB and Fed Res pushing for corporates to pay more tax?
My thinking that any economic policy which facilitates a corporation in getting away with €15bn in unpaid taxes is doomed.
To put it into perspective, the €15bn is equivalent to about an average €75,000 year salary for each of the employees in a Cork plant for the next 40yrs. It's clear to me what the trade off has been, the workers will pay taxes due on their wages, but the corporation will not.

The second observation is the ECB money printing scheme. He is not shy about it, he calls it for what it is - money printing. But then continues as if this is normal, that this is how we should use the money printing - to pay down debt!
That we, or any other country for that matter, can simply avail of money printing to pay down debt is utter nonsense.

Finally, he fails to propose what to do. Clearly, in good times, he advocates prudent spending and increasing the tax base. No problem with that, except he hasn't identified any areas where this should be done.


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## Protocol (9 May 2018)

TheBigShort said:


> The second observation is the ECB money printing scheme. He is not shy about it, he calls it for what it is - money printing. But then continues as if this is normal, that this is how we should use the money printing - to pay down debt!
> That we, or any other country for that matter, can simply avail of money printing to pay down debt is utter nonsense.



Just a note on QE.

I wouldn't call it "money printing", because no extra cash is actually printed.

Yes, extra money is created by the CB, and used to buy financial assets.

The CB does not lend to Govts, that is illegal.

The CB buys lots of financial assets, mainly Govt bonds, and so reduces LT bond yields.

So QE indirectly helps the Govt's finances, by reducing LT interest rates.


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## TheBigShort (9 May 2018)

Protocol said:


> Yes, extra money is created by the CB, and used to buy financial assets.
> 
> The CB does not lend to Govts, that is illegal.



Yes, I get all that thks. The ECB is reducing LT bond yields while simultaneously trying to stoke inflation through the same asset buying program. 
Excuse my ignorance, but how does all that work?


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## Purple (9 May 2018)

TheBigShort said:


> Yes, I get all that thks. The ECB is reducing LT bond yields while simultaneously trying to stoke inflation through the same asset buying program.
> Excuse my ignorance, but how does all that work?


It devalues money and so devalues debt. Reducing the real value of debt it what's needed. Of course it's not much use if everyone just uses it as an opportunity to borrow more!


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## MrEarl (9 May 2018)

This is a crazy situation....

If we can't generate a surplus and start paying down the national debt during the good times, how are we ever going to do so in the bad times ?

We would be better off selling non-core state assets and using the sale proceeds to reduce the national debt to more manageable levels. That in turn would see the cost of debt servicing reduced and help us balance the current account.  

There's also the obvious elephant in the room with regards to state employees pay, but sure God forbid we'd talk about anything other than giving those poor souls a decent pay increase and a few extra days holidays


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## odyssey06 (9 May 2018)

MrEarl said:


> There's also the obvious elephant in the room with regards to state employees pay, but sure God forbid we'd talk about anything other than giving those poor souls a decent pay increase and a few extra days holidays



If we still had our own currency in real terms as it goes down, so would pay. A lot easier for wages and prices to go up and down with a floating currency than having to put every wage change through a tortuous process with unions etc.


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## Protocol (9 May 2018)

TheBigShort said:


> Yes, I get all that thks. The ECB is reducing LT bond yields while simultaneously trying to stoke inflation through the same asset buying program.
> Excuse my ignorance, but how does all that work?



Through various channels, in theory:

https://archive.intereconomics.eu/y...he-euro-area-transmission-channels-and-risks/

"QE programmes can affect economic activity through various channels, including the interest rate channel, the signalling channel and the exchange rate channel."


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## Protocol (9 May 2018)

TheBigShort said:


> Yes, I get all that thks. The ECB is reducing LT bond yields while simultaneously trying to stoke inflation through the same asset buying program.
> Excuse my ignorance, but how does all that work?



[broken link removed]


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## Protocol (9 May 2018)

MrEarl said:


> If we can't generate a surplus and start paying down the national debt during the good times, how are we ever going to do so in the bad times ?



A very good point.


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## Protocol (9 May 2018)

MrEarl said:


> There's also the obvious elephant in the room with regards to state employees pay, but sure God forbid we'd talk about anything other than giving those poor souls a decent pay increase and a few extra days holidays



Note that all PS took two pay cuts, some had three pay cuts.


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## TheBigShort (9 May 2018)

Protocol said:


> [broken link removed]



Thanks Protocol, very interesting graph.

Some of the channels make sense and it's fair to say that QE has probably prevented total economic meltdown, for now at least.

Some of the channels however do give major cause for concern. Admitedly, this is my reading of the theoretical headings.

_Financial market frictions - _Financial markets are the cornerstone of free market economics and price discovery. Direct intervention in the workings of financial markets is a distortion of prices leading to questions of the real value of assets.

_Portfolio re-balancing channel _- This is dumping bad debt, or selling off liabilties for debt write-downs. Good for whoever is off-loading, the consequences for other parties not so clear.

_Increase in confidence - _Presumably for investors in government bonds? But what happens when QE turns to QT (tightening) as is projected at the end of this year?

_Flattening yield curve, increasing asset prices - _as above.

_Wealth effect _- purely theoretical, its impact (if any) is wholly indiscriminate and hard to direct.

_Exchange rate depreciation - _somewhat irrelevant if other CB's are engaging in QE and price manipulation practices.

_Increased credit supply - _credit is necessary, but increasing it? Isn't too much credit part of the issue in the first instance?

There are other concerns under the other headings, but I think it's obvious now that we are living in centralised banking economy complete with price distortion and manipulation.
I suspect QE will become the norm in the years ahead, rather than an temporary measure as it was intended.


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## MrEarl (10 May 2018)

Protocol said:


> Note that all PS took two pay cuts, some had three pay cuts.



Yes, I fully appreciate that. Those cuts were entirely appropriate, in some instances not as sever as they should have been. 

In some instances the cuts should not have been reversed, while in other instances they should only have been reversed for genuine notable and permanent improvements in productivity, or longer working hours etc.

I'm not saying one glove fits all when it comes to state employees here btw, other categories just need to be paid more for what they do, but that's for another discussion thread.

Also note that tens of thousands of private sector employees were made redundant and are not now being reinstated to their previous positions etc.


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