.This is a version of an opinion piece published in the Irish Examiner.So the Government has a deal on the anglo promissory notes in hand. There was an unseemly crowing from them and from much of the mainstream media when the deal was announced, the merits (some) and demerits (many) being lost in the laudatory glow. The deal was politically necessary for them – having staked their reputation on not paying the 3.1b this year they could do no other than produce some formula that would allow that. A key aspect of the deal is that it gives some breathing space. Many, myself included, have criticized the payment of any taxpayer money for private debts, but the fact remains that the government is in a better cashflow position now than it had expected to be when the present budget process was put in place. This raises the question of what to do with the savings. Lets leave aside that the savings are, for the future, dependent on the Central Bank holding onto the bonds, and concentrate on the here and now. The savings amount to approx. 1b per annum for the next number of years.
When a government has money it can do two things – spend it or save (pay off/accumulate less debt) it. There is an undeniable fact that regardless of the deal we are still in deep financial trouble. We are on target for 10b plus in deficit this year – the excess of government spending over income. While the meme has been fostered that “we are borrowing to pay the public service” the reality is that government money is fungible. Tax and borrowed money is deployed to pay for state sevices and to pay for the interest on borrowed money. No tax head is earmarked “teachers salaries” ; no bond is raised “for the guards overtime”. It all goes into one big pot and is spent as an when needed. It is fungible. And it is that fungible nature that is important here.
The reduction in planned borrowing can be put to the more rapid reduction of the overall likely burden of the national debt. That is a good way to spend it. It would give a return equal to the cost of borrowing, some 5% on the debt at present. But all government funding should be evaluated on a cost benefit basis. That is not the same cost benefit as would be used in a private company – the government has a social as well as economic payoff to take into account. While not building up a debt is a good thing, the question now is – is there an alternative use of this money, were it to be borrowed, that would generate a higher marginal (social and economic) return than not borrowing it and retarding debt accumulation. Having planned to borrow it, and having made budget and austerity decisions on the basis of that, might they wish to continue borrowing it even though it is no longer needed for the original planned purpose?
The call has been made to borrow this and to invest in capital. But the question is what kind of capital? The CIF would no doubt wish to see large scale engineering projects. But we have a decent, if needing some completion, motorway network and there is no crying need for any pharonic bertibowls in the near future. Much capital spending is of dubious longterm economic benefit. SIPTU has urged that the savings be used for job creation, but there is a lack of evidence that government helicopter money yields significant job creation. We need to think outside the box if we wish to borrow this money and use it
Two forms of capital rarely get mentioned – social and political. Take the latter – the reality is that we will still face into increased taxes, more taxes, reduced services and more expensive services for the next three years. But the governemtn is a coalition and FG is itself a well discuised coalition. Political capital has been squandered for two years in continuing to row back on or drive coaches and horses through promises made. If the government want to bring the population along with them for the next half of their tenure they need to show that the pain has been of some benefit. Modification of the fiscal adjustment to the relative benefit of lower and middle income earners via some part of the savings would yield political capital now to be spent in the future on truly transformative and thus disruptive changes to how we run the economy
Social capital, the glues that bind us as a society, have a complex but ultimately powerful impact on economic growth. As the recession has advanced we see that large parts of the country are in danger of eroding the social capital base. People in unsalable pyrite mansions, in developing sink estates, in rural areas that are poorly served with transport or modern IT, in far exurbs that demand hours of commuting, or in negative equity so deep that they can more easily move to ajob in Dubai than Dundalk are almost by definition going to be eroding their social capital. If we wished to use the money well we could do worse than dealing with some of these problems. We should invest in a proper national fiber broadband system, solve the most egregious mortgage issues, and deal with the issue of extreme commuting in so fare as we can. At the very least we should not reflexively recoil from borrowing in horror. At some stage this depression will end and the economy will stabilize. We need to start planning, something we are not good at doing, to build the kind of society we want to have. Because we live in a society not just an economy.