October 1, 2012
Maybe it’s the voyeur in me? I know it’s not for everyone, but the Comptroller and Auditor General’s report last week makes essential reading for anyone trying to get a handle on what is going on in this country.
While many in the media seem convulsed with the split in the cabinet, two much more important pieces of news emerged last week which tell us about where our economy is going. Neither portrait is a pretty one.
The first is the data on emigration, which continues relentlessly. Official figures show that the number of people who emigrated from Ireland soared to 87,000 over the last year. More than half of those who left the country in the 12 months up to April were Irish, and almost 36,000 were under the age of 25.
Talk to anyone in business in the country, and they will tell you that demand is seizing up. People are just not spending, not because they don’t want to, but because they don’t have it.
I spoke last week to someone in the advertising business and she told me that, coming back from the summer, she was hoping against hope for some uptick . . . but no, there was no sign. In fact, she said, it was getting worse.
The rise in emigration tells us that the pool of potential taxpayers and workers is shrinking while, at the same time, the amount of debt this country is carrying is increasing all the time.
The debt figures detailed in the Comptroller and Auditor General’s release are quite, quite startling. We all knew that there was a massive problem, but to see it written down so starkly shocks even those of us who had a fair idea how bad it was in the first place.
Look at the chart. It reveals that the general government debt stood at approximately â‚¬169 billion at the end of 2011. The significant upward trend in debt since 2007 is evident.
The ratio of debt to gross domestic product (GDP) is a standard sustainability measure applied for the purposes of comparison across the EU. The debt as a proportion of GDP rose from 25 per cent in 2007 to 106.4 per cent in 2011.
The deterioration in our government debt is continuing apace.
But with the economy stuttering at best and shrinking on the most meaningful measures, we have to find more money from less to keep the debt ratio stable.
A simple rule of thumb is that, to keep the debt ratio stable once the debt has gone above 100 per cent of your income, the rate of interest has to be lower than the growth rate of the economy. But our rate of interest is at least four times the growth rate of the economy.
In other words, the debt ratio is exploding.
We know that when a country has too much debt it can do one of three things. First, it can try to pay it if possible. But the numbers in Ireland mean it is impossible to pay all this debt. We simply can’t grow our way out of this.
The second thing you do, if you can’t pay, you inflate it away. But we can’t do that either because – even if there were an all-knowing Central Bank that could keep the rate of inflation just right, to deflate the debt without anyone noticing it – we don’t have it. We don’t have our own Central Bank, so the unique inflation route is out of the question.
What’s left is the third solution: we don’t pay it, not because we don’t want to, but because we can’t. This final option, absent any alternative, is looking increasingly likely.
Armed with this observation, let’s drill down into this mess to see some of the more horrific “hiddens” in the numbers and how this could affect you. One thing that jumps off the page at you is the fact that public sector pensions won’t be paid, because they can’t be.
According to the report: “Accrued pension entitlements of public servants are a significant liability of the state. At end December 2009, a total of â‚¬116 billion had accrued in respect of occupational pensions payable to public servants.
Those liabilities represent the estimated present value of the cash payments that fall to be met over the next 60 years in respect of pensions earned at December 31, 2009.”
This is the product of the pay-as-you-go system which is government public sector pensions. The problem is not just that the state doesn’t have the money, but that the public sector pension bill is rising at a ridiculous rate.
This time last year, the same report estimated the public pension liability at â‚¬108 billion at the end of 2008. In only 12 months, the estimated liability has increased by a whopping â‚¬8 billion.
Just to put this increase in the estimated public sector’s pension bill in context, the total income tax take last year was â‚¬13.7 billion. So the increase in the public sector pension bill alone amounted to 61 per cent of the total income tax take. Consider that for a moment.
It is pretty clear that, with numbers like this, the decision by the Germans and their friends on bank debt are driven not just by the bank debt problems, but also by their fear that all debts in Europe will be mutualised and they will have to pay. It is not hard to understand their position.
But they now have a choice. Countries like Ireland will have to default, renegotiate, repudiate, whatever you like to call it. We can grow out of this hole; we can’t inflate, so we won’t be able to pay.
The way that these events normally play out is that there comes a tax rate where capital simply leaves the country, because the middle classes panic as they see more and more of their income and wealth expropriated, either to pay for other people’s pensions or for debt.
This was why, in the 1990s, Brazilians and Argentinians were the largest buyers of real estate in Florida. They did this to protect their wealth. We saw this in the Ireland of the 1980s. It is always the same. Capital flees until the event happens – the default, in this case – and then it comes back.
The major news last week was this: Ireland is just unusual. In most countries, first the capital flees the sinking ship, followed by the people. In Ireland, the people flee first, as is already happening, followed by the capital. This is about to happen.
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