The next recession

[WolfeTone]

Interest rates are going to rise costing more money to service the roll over debt.its simple economics the interest rate is going to exceed the growth rate of the economy.

I have been hearing this talk of interest rates rising, for well over a decade now. Instead of rates rising, they went the other way into negative territory. So I'm not so sure anymore. The Eurozone is in a debt trap. Raising interest rates may occur at some point, but likely to be at slow and small incremental levels, rather than anything fast and significant.

I love economists they all have different points of view

Yes, me too. I tend to listen to the ones that, from my perspective anyway, are making sense.

 

[Firefly]

33 billion spent on interest in the last five years, the multiplying effect of that money in the ecomony cannot be overstated instead leaving by the back door.

Such uproar that the Children's Hospital could end up costing 2bn. We could build one every 4 months with the interest we are paying. But hey, let's keep borrowing money cos that's what governments do!

 

[WolfeTone]

Here is some data from the excellent trading economics website

The interest rate since 2008 has collapsed to zero, or effectively zero.

Ireland Interest Rate

The benchmark interest rate in Ireland was last recorded at 4.50 percent. This page provides - Ireland Interest Rate - actual values, historical data, forecast, chart, statistics, economic calendar and news.

tradingeconomics.com

The government 10yr bond, peaking at 12% in 2011, sending us into the bailout program. Obviously we couldn't borrow then. But its at next to zero now, some consider we shouldn't borrow at 0%? When do we borrow?
We could build schools, hospitals, roads, broadband, houses, all the good stuff. Instead, there is this persistent mantra that as a nation we shouldn't borrow anymore? This makes no economic sense.

Ireland 10-Year Government Bond Yield - Quote - Chart - Historical Data - News

Ireland 10Y Bond Yield was 2.62 percent on Friday October 11, according to over-the-counter interbank yield quotes for this government bond maturity. Ireland 10-Year Government Bond Yield - values, historical data, forecasts and news - updated on October of 2024.

tradingeconomics.com

Government debt spiraled out of control during the crash, but that is why it was called a crash! The increase in the debt level since 2013 has been relatively benign.

Ireland General Government Gross Debt

Government Debt in Ireland decreased to 215785 EUR Million in the first quarter of 2024 from 220672 EUR Million in the fourth quarter of 2023. This page provides - Ireland Government Debt- actual values, historical data, forecast, chart, statistics, economic calendar and news.

tradingeconomics.com

Meaning that all growth since then has reduced the debt level to within shooting distance of the requirements of the fiscal pact. And government spending as a % of GDP is reducing all the time!

Ireland Government Spending to GDP

Government spending in Ireland was last recorded at 22.7 percent of GDP in 2023 . This page provides the latest reported value for - Ireland Government Spending to GDP - plus previous releases, historical high and low, short-term forecast and long-term prediction, economic calendar, survey...

tradingeconomics.com

And yet, the focus of the economic performance is limited to media outrage and uproar over incidental issues. The childrens hospital for instance. The outrage is over the spiraling costs, and so should be. But I think it is fair to accept that if we want a childrens hospital, then we have to pay for it. So where does the €2bn go? Down a hole? Or does it go into the hands of private contractors operating in the country, who employ people?
The €2bn, or whatever it costs, is simply a transfer from taxes collected back into the economy from where it came from in the first place.
It may be a misallocation of capital spending (bearing in mind only a portion of the €2bn is misallocated, not the full amount), and that in itself is a cause for concern, but it is not a reason not to borrow.

 

[Protocol]

With one of the largest public debts in the world, we should not be borrowing more.

Given the strengths of our economy, we should be running a fiscal surplus and repaying debt.

If we need more infrastructure, then raise more taxes.

 

[WolfeTone]

With one of the largest public debts in the world, we should not be borrowing more.

On the face of it, absolutely correct.

Given the strengths of our economy, we should be running a fiscal surplus and repaying debt.

The strength of our economy is, in no small part due to borrowing cheap money.
Im not advocating borrowing for the sake of borrowing, im advocating it to boost economic growth and develop an infrastructure that suited to future requirements. That is what is occurring now. On paper, the figures are impressive, but there are structural deficits. Housing is a serious issue, particularly in centres like Dublin. The private sector is not adequately responsive to the needs of society, the State needs to step in.
The green/carbon reduction era is truly upon us. There is huge scope for infrastructural improvements needed.
5G, healthcare, growing population, etc, etc...
We cannot expect the private sector to deliver the long-term needs of society by itself. It needs State intervention, and money is cheap.
Obviously, it needs to be managed and controversies surrounding the children's hospital etc dont help. But we need clean energy efficiency and universal internet connection if we are to maximize on the potential for economic growth in the future decades.

 

[Protocol]

Why not use taxes, instead of borrowing?

 

[WolfeTone]

Why not use taxes, instead of borrowing?

Use taxes for what? This years capital expenditure is €5bn? (correct me if im wrong) of which around €2-3bn is borrowed.
Where are you going to tax that much out of the economy without sending it into recession?

 

[demoivre]

I have been hearing this talk of interest rates rising, for well over a decade now. Instead of rates rising, they went the other way into negative territory. So I'm not so sure anymore. The Eurozone is in a debt trap. Raising interest rates may occur at some point, but likely to be at slow and small incremental levels, rather than anything fast and significant.

I'm expecting a further easing in rates, possibly as early as next Thursday.

 

[cremeegg]

But the central point I got from it was Keltons view that national debt is not necessarily a bad thing.

Thats true, but debt is like fire very powerful and can be difficult to control.

Increasing national debt means money being pumped into the economy in creating employment, utilizing resources, increasing capacity for the future.

Ideally, but it can also mean money being pumped in to political projects, remember the Bertie Bowl, or the Boris bridge in London.

And its not just political vanity projects. Industrial and or investment projects with less commercial logic get financed because they carry political support. These may fail in themselves and perhaps worse they may squeeze out more valuable projects which lack he political support.

Strictly speaking that is not an issue of debt but of the control of public spending, however the two are linked when we are talking about state debt.

There was much complaint when the public i.e. the taxpayer bailed out the private debt of the banks. That was a decision (rightly or wrongly, rightly in my view) taken after the fact. State borrowing for industrial investment has the bail out pre-baked in. Thats much worse than deciding to bail out after a failure.

The important thing for me is that the rate of increasing debt is less than the rate of growth. Once this is occurring, then it can be plausibly said that that debt is being put to productive use overall (notwithstanding obvious controversies in the media with regard to some public spending items).

This is a fair point, for measuring success or failure on the upside, but I think you set the bar too low. The question is not is the economy growing faster than the debt, rather is the economy growing faster than it would without the borrowing.

On the downside, is the debt causing the economy to overheat.

In Ireland today we have high public borrowing, being used in the main for current expenditure rather than capital investment, and an economy on the verge of overheating.

The borrowing we are doing is not being used to finance the obvious infrastructural deficits we have. Housing, water, transport.

 

[cremeegg]

The private sector is not adequately responsive to the needs of society, the State needs to step in.

Many of us would think that the reason the private sector is not adequately responsive to the needs of society is because the state is continually stepping in. And that it does so in a ham fisted fashion.

As a simple example the difficulties around Apples efforts to secure planning permission for a date centre in Athenry.

 

[WolfeTone]

Many of us would think that the reason the private sector is not adequately responsive to the needs of society is because the state is continually stepping in. And that it does so in a ham fisted fashion.

No doubt. It works both ways. Equally many would think that the States defence for a €15bn tax advantage for Apple is the State stepping in a way that promotes foreign direct investment.
I agree with your points about political projects. This is often capital misallocated, unless of course you are the beneficiary you might think otherwise.
So the Bertie Bowl never came to pass, but the Abbotstown Sport Campus did. Is it needed? I would argue yes, I think sport is a critical element of our social fabric and the campus provides facilities to elite athletes to train and develop that they would otherwise have to go abroad to use in order to remain competitive (remember the fuss over the 50m swimming pool?).
We pay for that. It is unlikely that private organizations could provide such an extent of facilities as a viable commercial entity.