Tag Archives: mental accounting

For what, exactly, are we borrowing billions?

This is a expanded version of my column in the Irish Examiner 18 May 2013.

Hardly a week goes by now without a minister or backbencher reminding us, usually in stern , schoolmasterly tones, that “we are borrowing a billion euro a month to pay for <insert public sector spending head> ”. So we borrow for nurses salaries, for public sector pay, for teachers, for all sorts.  Sometimes this is couched in terms of borrowing for social welfare, but usually it is attached to public sector pay. So we borrow a billion for nurses pay, for teachers pay, for all sorts of pay. We never borrow it seems for the running of the two ringed circus of kildare street.

homerbrainRegardless of where it is attached it is a useful encapsulation of bias and special interest pleading from those doing so. First, it is as clear a demonstration as can be of what is called mental accounting; second it demonstrates an unconscious or conscious demand for cuts to be made, and third there is a concomitant sotto voce element usually that suggests that the money if it has to be borrowed would be best directed elsewhere. All three are challengeable if not demonstrably fallacious.

Take mental accounting. This has nothing to do with how Bertie dealt with shopping bags of money, but instead is a well-known psychological bias. Its about compartmentalizing monies that are in reality all the same. This bias leads people to have money on deposit earning small amounts of interest while simultaneously having large debts costing a lot. The most sensible thing would be to use the deposit to pay off the debt. At present we have over 30b in cash balances earning 1% or less while also having 190b plus in debt costing nearly 5% per annum.  Government money is fungible. There is no special bond issued or troika drawdown for paying nurses alone, or for the dole. Its all in one pot. In this regard we might treat with some considerable scepticisim the notion that in the long term the monies from the local property tax will be devoted to things local. No more than the road tax is devoted to traffic and road expenditure will this hold, in the long term.

Treating public sector pay or welfare as separate elements and attributing to them the excess of spending over income is a  further classic case of mental accounting.  It may also demonstrate a blindness, willful or otherwise, on the part of the speaker about what exactly constitutes the structure of government spending and revenue. If we examine (data taken from eurostat)  the government expenditure and revenue over the last 18 years we find that by far the typical pattern is for the sum of public sector wages and pensions plus social welfare to be be vastly exceeded by the total tax plus social insurance take. Only in 2009 and 2010 was this not the case. Now, one might well argue that we do not want to spend money on these issues but that is  a separate issue. Below is a summary (go to http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=gov_a_main&lang=en and play around yourself…) income and expenditure account for the General Government sector in Ireland

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What is clear is that if we want to play the mental accounting game we need to accept that depending on the categories we use the result will differ. This is of course another psychological bias, that of framing..But from a purely cash basis we raise enough to pay our teachers and doctors and to pay the welfare. We might not want to pay these sums, and thats a separate argument, but to state that we do not as a state raise enough money for them is fallacious.

Where then does the money go? See below…The large blip in the “other” category represents our cash bailout..


We as a state incur other costs ; capital goods and equipment depreciates and that accounts for a couple of billion per annum. Even factoring in this we still about break even. We have to pay for goods and services, we subsidize private enterprise and these plus the interest on the national debt are for what, at least as arguably as the wages of nurses or the dole,  we borrow a billion a month. In fact this year the total deficit is pretty much the sum of what we spend on private sector provided goods and services plus interest.  Anyone who has any experience of public sector procurement knows that there is vast waste. Private sector companies have done as least as well out of the public purse as have the public sector workers over the years.  There was in relation to private sector professional services a Golconda of expenditure that  rained forth. No public sector manager will yet get fired for seeking additional vastly expensive legal advice from large law firms or seeking accounting or consulting advice. They might for hiring  a new staffer…. The interest bill also requires some thought. That which has tipped us over the edge is the cost of the bank bailout. And we bailed out non Irish bondholders and Irish based depositors.  The ongoing cost of this  are part of the borrowing also.

Hidden here is the assumption, or sometimes as recently by IBEC the overt suggestion that we should further cut expenditure on current government spending and divert it to capital. Apart from this being a naked play for resources, it also is questionable in the circumstances in which we find ourselves.  It assumes three things – that capital spending is more beneficial than current, that there is no economic gain from current spending and that the economy would be better off if this rebalancing took place. Lets leave aside the remarkable argument that there is no economic benefit from public services. People who think this assume that the public sector consumes alone and is never investment. They then however will demand more public money be devoted to investment, as somehow spending on a bridge or road will magically create as least as much social and economic wealth as spending the same equivalent on health or education.

The ESRI benchmarking analysis in 2010 suggests that there are remarkably similar dynamics in terms of their effect on the economy of cutting public sector wages and cutting capital expenditure. There is no guarantee whatsoever that increased capital expenditure will offset the falls in employment and consumption from cutting current expenditure.  In any case, it is not clear what capital spending is needed – hospitals and schools may be built but are useless without staff.

We borrow to spend on all government expenditure. Some of this benefits the private sector, some the public sector.  Some arises as a result of bailouts, some from the unbalanced tax base we created. All is part of the overall economy. To finger point and attribute this borrowing as being uniquely directed at one sector or another is neither economically sensible nor coherent, no matter how politically pleasing it may sound.