Despite positive economic signs, Ireland is far from solvent


At the start of every New Year this column does a state of the nation assessment with predictions for the coming 12 months. This year, more than ever, such an exercise is relevant since we have just exited the IMF/EU bailout program and regained our economic sovereignty.
We are moving away from the most humiliating period we have been through since the foundation of the state. The shame of being unable to pay for the day to day running of the country without having to be rescued financially by the IMF and Europe is not something we are going to forget in a hurry.  
The problem began back in 2008 as our boom turned to bust. The collapse of the property market meant we were in deep trouble. So much of our tax had come from property that when the bust happened the state’s revenue collapsed as well.

Our budget deficit climbed as the cost of welfare for the unemployed soared. And cutting state spending enough to match our very reduced level of revenue seemed impossible without causing major social unrest.

The banks were an even bigger problem. They had lent so much on property they were insolvent, even if we did not realize it at the time when we gave them a blanket state guarantee at the end of 2008.   

The black hole in the banks eventually became so huge that the state guarantee began to drag down the country. By the end of 2010 we were fast approaching the point where we would not be able to pay the teachers, doctors, police and everyone else on the state payroll, and welfare payments would dry up.

The international money markets realized the game was up and they stopped lending to us. The collapse of the state was about to happen.  

So finally we dropped the pretense, and in November 2010 we took the IMF/EU bailout to keep us going until we could sort out the mess. We had no choice -- no one else would give us money.  

The cutbacks and tax hikes had already begun in 2008, and they continued into the bailout program, getting more and more difficult each year. The bailout billions came with an austerity program to get our finances back in order, and austere it certainly has been.  

By the end of 2013, under Troika guidance, we had managed to restore some order to the state’s finances with the budget deficits coming down, and we exited the bailout program on time and on track at the end of December.
So we start 2014 once again in charge of our own finances, without the quarterly visits from the Troika to tell us what to do.   

This has been presented as a major achievement by the present government, and it is something that gives people some satisfaction after all the financial pain we have been through.   

But the truth is, as we have been pointing out here, this is only the beginning. We still have a mountain to climb.   

Being out of the bailout means that once again we are completely reliant on borrowing from the markets to finance the state. And on that score, the start of 2014 has gone well for us with Ireland’s first post-bailout bond sale last week raising €3.75 billion in the markets.  

In fact the bond offering was more than three times oversubscribed, with offers totaling €14 billion coming in, which reflects how much our international reputation has recovered.   

The icing on the cake last week for our Minister for Finance Michael Noonan was him being named European Finance Minister of the Year by the Financial Times magazine The Banker, which gave him the award for our bailout exit and successful re-entry into the bond market.  

So is everything in the garden rosy for 2014 and the years ahead?  

That’s what you would think from the celebratory noises coming from the government last week, with some ministers even hinting that easing off on taxes might be possible soon. The reality is rather different.
For a start, it’s a bit strange to be clapping ourselves on the back for being able to borrow more money on the markets again. An ability to cut spending and eliminate the budget deficit and thereby remove the need for more state borrowing, now that would really be something to celebrate. But we’re still at least five years away from that.   

The vague talk of tax cuts is inspired by the local and European elections that are coming up soon which are seen as a sort of mid-term test for the government. But it’s only talk.  

The truth is we can’t afford to lower taxes and we can’t afford to increase spending on services. Despite all the tax hikes and spending cuts over the past few years, we still had to borrow close to €1 billion a month in 2013 to keep the state ticking over.  

In 2014, if we stick to the Troika plan, that should be down to €8 billion in borrowing for this year.  But if we start easing taxes and increasing state spending that won’t happen.

And if the markets see that we are slipping off the straight and narrow, they might well decide that we are becoming a risky bet again.