Ireland’s new – and much-needed – self-denying ordinance
Spending money is fun, especially if it involves shoes. Like everyone, I have been known to ‘pop out for a few bits’, only to return laden down with shopping bags and aching feet.
But my spending power is limited. Even when economists berated the amount of readily available cheap credit, I did not fully reap the benefits. In my experience, credit card companies and bank managers want their money back. There is no such thing as a free pair of Choos.
When it comes to government spending, however, new rules apply. Like some Lottery winners, some governments spend, spend, spend until the funds – theoretically restricted to tax revenues and money market borrowings – run out. Yet, blinded by the new lifestyle and the adulation of the population, they just carry on.
The Irish government has learned the hard way that, sooner or later, even Celtic tigers expire. It has been forced to accept an €85 bn ($111 bn) bailout from the International Monetary Fund and European Union. To put that figure in context, it is marginally less than the annual GDP of New Zealand or the equivalent of two thirds of Ireland’s annual output. Or €18,900 for every man, woman and child in the republic.
In exchange for the funds, the Irish government will introduce a four-year plan to slash its budget deficit from 32 percent of GDP to 3 percent. Along with plans to cut social welfare spending and government jobs, slash the minimum wage and raise taxes, the Irish government will introduce a new law simply to prevent it running up excessive budget deficits. Just think about that for a moment. ‘Stop right there, Paddy, I know you want that extra hospital, but you’d be breaking the law.’
Perhaps I am naïve, but I thought monitoring government expenditure was the role of the Treasury. I imagine the moneymen, with their big calculators, frantically pressing buttons as the bills come in to keep a tally on the running total. I thought systems would be in place to alert a government that its expenditure exceeded its income and that it might be time to rein in the spending. (In the real world, we call these bank statements.)
Admittedly, the total bill rose dramatically (to 80 percent of GDP) as the government was forced to prop up the country’s insolvent banking system. Can the government be blamed for the banking crisis? In a word, yes! Irish house prices quadrupled in the decade to 2007, whereas those in North America ‘only’ rose 195 percent. This bubble was fueled by poor lending standards of Irish banks; in 2006, two thirds of loans to first-time buyers had loan-to-value in excess of 90 percent, while one third received 100 percent loans.
The Irish government never once questioned the logic of such an approach, and merely relied upon (and signed off) the banks’ own internal risk models, which assumed a worst-case scenario of a 20 percent house price fall.
The Fianna Fáil party currently governs Ireland. Never was a name more apt.
