The country is sinking into debt at a frightening speed, and it’s getting worse every week because the government is spending over a third more than it collects in tax.
That’s happening because we expanded state spending in line with the huge tax revenue inflow during the property boom, and even though the property bubble burst three years ago and our tax revenue started to dry up, state spending has stayed much the same.
That’s one big problem, because cutting back state spending causes a lot of people a lot of pain.
The other big problem is that we have to put around €50 billion into our banks to stop them collapsing -- and with them our entire financial system.
That money has to be borrowed, and the interest payments on it will make our annual budget deficits even bigger. That means that the cutbacks that are coming in the budget in a few weeks have to be even deeper if we are to keep to the four-year plan to get the deficit under control.
It’s going to be extremely tough, with extra taxation and major cuts in spending on state services. But we have to stick with the plan we have agreed with the European Union because it’s the European Central Bank that is underwriting our finances at present.
We don’t have a choice. So yes, it’s going to be very difficult and the pain is going to continue for several years. We’re in way over our heads and there’s no money to ease the situation.
Which brings us back to the question -- where has all the money gone? It’s just a few years since we were riding the Celtic Tiger boom and being told that per head of the population Ireland was the richest country in Europe and possibly the world. We had so much money, we didn’t know what to do with it.
So it’s a valid question. Where has all that money gone?
It didn’t vanish, people say. Someone must have it.
It’s also an important question, because if we could find that money, maybe it could be heavily taxed and maybe that would reduce our deficit without the kind of catastrophic cutbacks in state spending we are now facing.
And we’re talking about an awful lot of money here. We’ve got to put €50 billion into our banks, and almost all of that is to replace the billions they lost in the property crash.
But someone got that €50 billion. As I’ve said already, it just didn’t vanish into thin air.
So where is it? Who has it? And can we get any of it back?
What has brought the Irish banks to the point of collapse is that the billions they loaned to developers and speculators during the boom was money they had borrowed on the money markets. They didn’t just do banking the old fashioned way, accumulating deposits from savers and then lending it out. Oh no, that was much too slow for our Celtic Tiger bankers.
When the property boom took off our bankers financed it by borrowing billions and billions on the money markets. And when the crash happened three years ago they were caught with their pants down.
Apart from some of the riskier bonds involved, all that money has to be paid back. But the banks don’t have it and the developers they lent it to don’t have it either.
So who has it? Well, I can tell you there’s some people here who still have smiles on their faces because they’re the ones who got the money.
A typical example would be the farmer with a few acres of land on the edge of a town within an hour or two from Dublin (or Cork or Galway, etc.). During the boom developers were looking for land like that to build new housing estates for commuters who couldn’t afford to buy a home in the city. So the land that used to be worth a few thousand euros an acre as agricultural land was then worth half a million euros an acre as housing land.
The same kind of thing happened in the center of towns and cities where overgrown sites with derelict buildings (maybe an old factory) suddenly were worth a fortune as a location for apartment blocks.
A lot of the people who owned farmland near towns or unused sites in cities got an awful lot of money. They went from being ordinary people with ordinary incomes to millionaires overnight. It was like winning the lottery.
Is it fair that they should still have all that money when state services to poor people here are about to be slashed? Well, fair doesn’t come into it, and retrospective penal taxation won’t be possible. And there’s also the fact that if they put their money into bank shares at the time, they have now been wiped out like the rest of us.
Then there’s the fact that a big chunk of the billions that developers here got from the banks was used on projects overseas where inflated prices were paid for sites, office blocks, hotels and so on in the U.K., Europe, the U.S. and so on. No one is getting any of that money back either.
But the whole question of where the money went is even more complex than that. It wasn’t just the landowners and the owners of the derelict sites who got a lot of cash.
Yes, they got a lot of billions. But billions more of this borrowed money trickled down through the system.
The result was that the price of everything soared, especially everything to do with property. Bricklayers and plumbers and electricians were getting at least a thousand euro a week.
Ordinary houses in good suburban areas were costing a million.
Everyone had to have a big flat screen TV in the lounge and an SUV in the garage. Lots of kids were sent to fee-paying schools. It was money, money, money.
The price of everything -- clothing, furniture, even food, soared. Dentists, doctors, lawyers and all the other professionals pushed up their fees.
Everyone wanted more money to pay for all the things they had to have, like two holidays a year, orthodontics for the kids, designer labels, eating out … and all the rest of a lifestyle that had become “normal.”
While all this was going on, we failed to notice that our manufacturing industry was dying, and even though we were all spending much more the country wasn’t really producing much more, apart from apartments and houses and office blocks.
If we are honest here -- and so far there’s not much sign of that -- we will have to admit that the answer to the where has all the money gone question is that we spent it. All of us.
We demanded more and more and lost sight of the uncomfortable reality that, from a national perspective, it was all borrowed money.
Yes the developers got a lot and the people who sold them the sites got a lot as well. And it’s true that the people at the top got the most.
But it’s also true that the excess trickled down to all levels, down through people doing all kinds of jobs and right down to those who managed to stay on welfare even in the middle of the boom.
Our huge army of state workers (relative to the size of the country) fought for and got parity with the madness that was going on in the private sector. Our state paid teachers now earn over a third more than their counterparts in the U.K.
And why not? After all, we have a prime minister (of our less than five million people) who earns far more than the U.S. president (of over 300 million people).
The truth is that we all got a taste of the billions. Instead of really becoming more productive as a country, we fed off the property bubble built on borrowed money.
Most of us did not realise what was happening, but that does not let us off the hook. We’re all to blame.
Fixing it, as I have been explaining here over the past few weeks, is going to mean getting back to reality, lowering our standard of living and living within our means.
Getting the angry public here to accept what that means for each and every one of us is not going to be easy.
The politicians here know this, and that is why there is now talk here of a national government, of all the parties coming together to agree on the four year plan of cutbacks and extra taxes to get us out of this mess.
(Think of it like the Democrats and Republicans in the U.S. getting together to run the country for a few years to get through a crisis.)
It may seem far-fetched, but only if you don’t fully understand the size of the challenge facing us. Basically we’re on borrowed time thanks to all that borrowed money.
We have about one year to get on track … and if we fail the IMF will be in and we will lose our economic independence for years to come.
So next week, if we’re all still sane and solvent, we will be looking at whether a national government here would really be the answer.