We need to manage our national finances more prudently.

J

Jazz1945

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Compliments, Brendan, on your article in today's Irish Sunday Times. It reflects what's increasingly on Irish peoples' minds (and don't forget to factor in the significant MICA compensation)and helps to bring home the abysmal, shortism of Irish politicians mindsets.
 
Thanks Jazz

Here is the text, as submitted, I believe there was a run on the Sunday Times yesterday, and most shops had run out of copies early in the morning.



Source: https://assets.gov.ie/216795/ce94676e-81bd-42dd-ab8c-90103ba1318c.pdf



Most people act fairly responsibly when it comes to managing their personal and family finances. They think long-term. They live, more or less, within their means. During the good times, they build a up their savings in anticipation that there probably will be some bad times and some nasty financial shocks. They contribute to a pension fund. If they get a windfall or an inheritance, they don’t blow it all. Sure, they might buy a new car or take an expensive holiday, but they keep most of it, or use it to pay down their mortgage.

When they have children, they become even more responsible. They try to put money aside for their children’s education. They try to help their kids get on the housing ladder. And when they die, they would like to leave their kids an inheritance – maybe even the family home, mortgage-free.

While there are differences between managing the family finances and managing the public finances, we should apply the same general principles to both. The nation should live within its means most of the time. During the good times, we should be putting money aside so that we don’t have to cut back as much during the bad times. We need to think about our own future, our children’s future and our grandchildren’s future. When we get windfalls, we should not blow them on increasing public expenditure, but we should pay down our national debt or put them into a national pension reserve fund.

That is what good government should do. But Irish governments haven’t behaved responsibly for many decades as can be seen from the accompanying graph.

Government borrowings ballooned as a result of the financial crisis. We borrowed roughly €30 billion to bail out the depositors in our banks. We borrowed another €120 billon to maintain public expenditure during the economic crisis that followed.

But since then, the Irish economy has boomed. We have had record tax receipts boosted by artificially high tax payments by foreign multinationals. We had low unemployment, so our social welfare bill was reduced. And because interest rates dropped to near zero, the cost of servicing our national debt fell dramatically.

But instead of using these windfalls to reduce the huge debts we had built up during the bad times, we continued to spend, spend, spend. Then we hit another bad patch with Covid and had to borrow another €30 billion. And politicians keep coming up with very expensive grand plans such as Sláintecare and Housing for All, which would massively increase the cost of running the state, if they were ever implemented. Over the last five years, no western European government has increased expenditure by as much as the Irish government.

Make no mistake about it, this mismanagement of our public finances has made us very vulnerable. We are facing interest rate increases, general inflation and a probable recession. We could lose a substantial part of your Corporation Tax receipts from U.S. multinationals. We are also facing huge demographic challenges and climate change.

When any or all of these shocks hit us, the government may not be in a position to borrow any more because of the very large national debt we have already built up. The government will be forced into cutting expenditure at the very time when they should be increasing it to compensate for the fall-off in private consumption.

The people who will suffer most are those who are dependent on public services for a decent standard of living. The well-off will survive ok – their investments may fall in value and they may have to pay more taxes, but they won’t starve. But if the government is spending most of its tax income servicing the national debt, then the poor will face real austerity in terms of reduced health services, housing and social welfare payments.

At the National Economic Dialogue held in Dublin Castle this week, there were few calls for responsible financial management – all the calls were for increased expenditure or reduced taxes. Government ministers made some token comments about financial resilience, but the reality is that they will continue to spend, spend, spend. Those of us who call for reduced spending and increased taxation don’t get invited to these events.

The political system does not reward responsible long-term financial management. Instead, it rewards political parties promising high public expenditure and low taxation. Who would vote for a political party promising to cut expenditure and to raise taxes?

We need a structural solution to this political problem. We should give the Irish Fiscal Advisory Council, or some new statutory body, the power to manage the public finances for the long-term. Take it out of the hands of politicians. It would decide whether a surplus or deficit were appropriate, and the government of the day could make choices on spending and taxation within those limits. If the government wanted to increase public expenditure, then they would have to increase taxes. If they wanted to cut taxes, they would have to cut public expenditure. But they couldn’t cut taxes and increase public expenditure unless the IFAC decided that running a deficit was the correct strategy at that time.

There is a precedent for this. We only recovered from the last financial crisis because our lenders imposed the Troika on us and took the overall control of our finances out of the hands of politicians. They set the budget limits and the government made their spending and taxation choices within those limits. We should appoint our own Troika to impose these disciplines on us.

The EU’s Stability and Growth Pact does set a “fiscal space” for governments to operate within. But this has been completely ineffective. It has allowed the Irish government to blow the recent windfalls on public expenditure and it has not forced the government to make provision for the rough times ahead.

Parents try to leave their children and grandchildren a legacy. Our politicians are leaving our children and grandchildren a legacy ok, a legacy of unsustainable debt.



Brendan Burgess is the founder of the Consumer Forum askaboutmoney.com


Brendan
 
The responses on the website, are very well expressed

Edness
22 HOURS AGO

Politicians are the worst for managing state finances - more like drunken sailors than fishermen. The immoral default is to borrow money, buy fish at the highest price, distribute fish willy nilly. The better approach to support and teach fishing. The author rightly points out gov spending and household spending is not the same. Gov borrowing is terrible when used for current spending, but if tax take and borrowed money is well-invested in correcttly controlled projects that generate long-term returns for the state, such borrowing is almost mandatory. We urgently need to put restrictions on the drunken sailors. Linking their pensions to the consequences is essential... and sobering. Skin in the game.

Ludraman mor
18 HOURS AGO

Excellent article. But what can we do when even the Party of Budgetary Restraint is behaving like a drunken sailor?
 
You have my vote.

Is there precedent for it in other countries outside of the emergency actions of the Troika?
 
Hi Zenith

The EU has a Stability and Growth Programme which sets deficit limits. But it doesn't seem to work very well. Remember all the talk of "Fiscal space" a few years ago?

In the United States - the deficit is set at 3% (?) I think. Congress(?) must agree to override it. That is why you have huge showdowns and a lot of public servants are temporarily laid off until they reach agreement.

My proposal is that our own "troika" would actively manage the public finances counter-cyclically. During the boom times, they would go for surpluses. And when we need a big increase in public spending, they would allow it.

But the decisions would be based on long-term economic planning and not on the electoral cycle.

Brendan
 
When an American hears about a project or plan to provide services the first question they ask is "How much is this going to cost me?". Irish people seem to think there is no link between the taxes they pay and the money the government spends. Maybe that's because of our very high Corporation Tax receipts.
 
PGF2016 said:
Sadly, it is the politicians who would put this in place. No politician is going to enact measures to restrict their ability to buy votes.

And I think you give the Irish public too much credit as regards their fiscal prudence.
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Politics is the art of bribing people with their own money.
 
PGF2016 said:
Sadly, it is the politicians who would put this in place. No politician is going to enact measures to restrict their ability to buy votes.
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I wonder about that. They would be able to blame IFAC for actions they needed to take that the public did not like. If FF/FG are genuinely concerned about what a profligate SF will do to the Irish economy it would be a great way to reign that in.
 
Brendan Burgess said:
While there are differences between managing the family finances and managing the public finances, we should apply the same general principles to both. The nation should live within its means most of the time.
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No it shouldn't. This is taking a tennis-club accounts approach to public finances, which are a different animal. States (unlike their citizens) are perpetual, and there will be someone around to tax in fifty or a hundred years time to pay the debt back. This means that states can and should borrow to invest in infrastructure that will be the foundation of a future tax base.


Brendan Burgess said:
We need a structural solution to this political problem. We should give the Irish Fiscal Advisory Council, or some new statutory body, the power to manage the public finances for the long-term. Take it out of the hands of politicians.
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No, no, and no. Pooling our resources via taxes is an exercise in collective action, and it needs clear lines of accountability to those who contribute and benefit. Handing this over to an unelected body takes the power to far away from the people.

The IFAC does great work by the way in its analysis and policy advice, but the minute you give it power to make decisions it will lose its ability to give independent advice.
 
The perfect example of this in the US was/is universal health care. I have 2 relatives , not short a few bob and allegedly Christian, far right in my view" and they were seething at Obama for even suggesting it.
 
Zenith63 said:
I wonder about that. They would be able to blame IFAC for actions they needed to take that the public did not like. If FF/FG are genuinely concerned about what a profligate SF will do to the Irish economy it would be a great way to reign that in.
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That opportunity sailed away 20 years ago and nothing they could do now will change voters minds.
Everyone wants everything now.

Mc Creevy, "I have it so I'm going to spend it" ruined the country as most now think they always have it.
 
Paul O Mahoney said:
That opportunity sailed away 20 years ago and nothing they could do now will change voters minds.
Everyone wants everything now.
Mc Creevy, "I have it so I'm going to spend it" ruined the country as most now think they always have it.
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It wasn't just him though, Garett the Good managed to ramp up the fiscal ineptitude of the previous FF government. It was only in the late 80's that any measure of fiscal responsibility was evident in an Irish Government and that was fleeting.
 
That would be true if that was what we are doing but we are borrowing to fund current expenditure. That's the problem. It's like benchmarking all over again when we committed to long term current expenditure based on short term tax revenues. We have had consistently pro-cyclical economic policies for the last 30 years and the strong probability is that the opposition will be even more reckless when they are in power after the next election.

NoRegretsCoyote said:
No, no, and no. Pooling our resources via taxes is an exercise in collective action, and it needs clear lines of accountability to those who contribute and benefit. Handing this over to an unelected body takes the power to far away from the people.
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Such a body would be accountable to the Government, the Dail and the Public Accounts Committee.

NoRegretsCoyote said:
The IFAC does great work by the way in its analysis and policy advice, but the minute you give it power to make decisions it will lose its ability to give independent advice.
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I do agree that it shouldn't be the IFAC as they do a good job in their current role and so shouldn't have a conflicting brief.
 
Purple said:
That would be true if that was what we are doing but we are borrowing to fund current expenditure.
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You are wrong. Have a look at Table A6 here.

Net borrowing of public sector (ie the government deficit) in 2021 was 3.6% of GNI*, 0.8% of GNI* in 2022.

Investment (gross fixed capital formation plus capital transfers) was 4.6% of GNI* (2021) and 5.4% of GNI* (2022).

Deficits are below what is being used for public investment.
 
Purple said:
It wasn't just him though, Garett the Good managed to ramp up the fiscal ineptitude of the previous FF government. It was only in the late 80's that any measure of fiscal responsibility was evident in an Irish Government and that was fleeting.
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In fairness from 88 to 2002 were extremely good years ,ok devaluation of the punt is hard to understand what benefits or costs it caused, but by 2002 ish the national debt was circa €40/45bn , surpluses were common, SSIA was introduced, Wally idea, funds were coming in from EU and were spent well, motorways etc.

By 2002 one would have thought that "maybe we have a future " then we all know what happened and the Government of the day " didn't know why" and we have literally sinking slowly since, not just economically but all other aspects of our country.

But, and this my optimism showing, we did it before why not again?
 
So what, we are still borrowing to fund current public expenditure, or do you think we shouldn't build any roads or schools or hospitals?
The latter are critical public infrastructure and are a national priority. In other words they get the money first. Pay rises and giving doctors and nurses more money to waste in their inefficient running of the health service comes afterwards. It is the latter that is borrowed.
 
Yea, I'd go with that. The PD's under Mary Harney did the State some service. (I'm not sure if we are allowed to say that CJ Haughey also did in his last stint in power).
 
Purple said:
Yea, I'd go with that. The PD's under Mary Harney did the State some service. (I'm not sure if we are allowed to say that CJ Haughey also did in his last stint in power).
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I think "some " is appropriate when it comes to Harney, I attended a " lunch" with her after we announced more jobs , year ? Early 2001 I think, sharp woman, but the decision to set up HSE was fine but nothing changed in the background and nothing was done to change it.

And her " inner" circle was less than pragmatic when it came to decisions that would have made the country better. You can probably guess.
 
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