Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Irish people no better off now than during Black Death, and other stories

Last year, Vincent Browne won this site’s inaugural “Worst Policy Suggestion of the Year” award, with his idea that all salaries should be capped at €100,000. This amazingly ill-thought idea would have immediately cost the State €4.5bn in lost income tax revenues, not to mention disastrous second-round effects on Ireland’s competitiveness, employment and indirect tax revenues. I thought to myself at the time, if only the Commentariat could stick to opinions, Ireland might be a safer place.

That was, however, until I read Fintan O’Toole’s April 6th opinion piece entitled “Bailout has turned us from citizens into serfs” in the Irish Times. In it, O’Toole reaches new heights of frankly ridiculous hyperbole, with his equation of Irish citizens now to our ancestors who starved to death in their hundreds of thousands in the mid-nineteenth century. Such is the poor standard of opinion writing now that the imagination is limited to attempting to out-do all previous comparisons. It’s only a matter of time before Fintan announces someone as the new Cromwell and proves beyond doubt (to himself at least) that Irish people are no better off now than during the Black Death.

The nub of O’Toole’s article is that he sees no reason for his sons, both in the early 20s, to stay in Ireland. He bases this on Nat O’Connor’s thinking out loud over on about the cost of the bank bailout per worker. O’Connor states up front that “it’s not clear that we have enough information to know [debt servicing costs for the bailout] yet”. O’Toole, however, sees no reason to let this get in the way of a good soundbite, proclaiming that anyone “lucky enough to have a job in Ireland over the next 10 years” will be working one day a week to pay off bank bailout debts. He even writes, seemingly without a hint of irony, “it is no exaggeration to call this feudal”.

O’Toole’s article is set to win “Worst Opinion Piece of the Year” for two very important reasons: first, his focus on the bank bailout as the centrepiece of our problems, and second, his belief that Ireland has no economic future.

Firstly, O’Toole’s lamentation of the state of the current Irish economy is entirely about the bank bailout – i.e. NAMA and State-funded bank recapitalisation. I’m certainly no apologist for NAMA, as I’ve made clear on this site over the last year. However, an Irish person worrying exclusively about amounts we may have to pay on NAMA and the banks is a bit like a home-owner fretting about a leak in his attic while his house is on fire. Ireland’s yawning deficit is by far the bigger worry. The graph below shows the absolute scale of a few things: Ireland’s national debt (1) in 2006 and (2) again in 2009, (3) a worst-case scenario for potential losses on NAMA, (4) a likely level of debt servicing for bank recapitalisation and two scenarios for Ireland’s Exchequer deficit – (5) a good case and (6) a bad case. Notice which ones dwarf our national debt – and it’s not NAMA or bank recapitalisation.

Ireland's NAMA and bank bailout in perspective
Ireland's NAMA and bank bailout in perspective

The figures are calculated as follows.

  • The worst case scenario for NAMA is where the current crash turns out to be a once-off and permanent 70% fall in property prices. This would mean that we are paying about €45bn now for loans on property originally worth €81bn but ultimately worth just €25bn.
  • The likely level of debt servicing for bank recapitalisation is calculated off 5% interest rates and borrowing of €2bn a year until 2012 and then €1bn a year until 2020. As with Nat O’Connor’s figures, it assumes that only interest is paid (the idea being the banks are sold off at the end of the period for enough to pay off the principal).
  • The two scenarios for Ireland’s Exchequer deficit both look at cumulative borrowings by the Irish state over the period 2008-2014. The good scenario is the one I outlined last December. In it, public sector pay was frozen until 2014 in return for substantial cost-saving reforms (sound familiar?!) to the tune of about 5% a year, especially in health and education. The bad scenario is where this doesn’t happen (sound likely?!) and the current deficit of about €19bn persists until 2014.

Perhaps the worst aspect of the bank bailout is that it is not only distracting us all from the bigger picture – over-spending on public services relative to government revenues – but also that it is giving everyone an excuse to say “I’m not responsible”. If we didn’t have the bank bailout, the focus would be squarely on public sector reform and no-one would be able to point to the banks as a distraction.

The more bizarre claim in O’Toole’s article, however, is that there is not “one compelling reason… to stay here” and that the Irish find themselves “back in precisely the same position of feudal servitude” as their ancestors who “had their rents raised when their absentee landlords lost fortunes at the gambling tables of London or Paris”. You could be forgiven for going back to Maddison’s historical statistics and double-checking that, controlling roughly for changes in spending power, Irish people are about 30 times better off per capita than they were in 1820.

Five more facts that are somewhat inconvenient for O’Toole’s analysis:

  • Ireland is still one of the wealthiest countries in the world. When ranked by per capita output and controlling for local price levels, we are inside the world’s top 10. If that’s too economicsy for you, we also rank in the top five of the more broadly-based UN Human Development Index. The current crisis makes a little dent in that, but overall we’re still very very wealthy by international and historical comparisons.
  • O’Toole seems to think that no-one in Ireland is working. In fact, about 9 in 10 people who were working here in Ireland at the height of the boom are still at work. If you work outside agriculture, manufacturing and construction, you’re almost certainly still in a job.
  • Ireland is still one of the top locations worldwide for foreign direct investment, as recent announcements from IBM, eBay, LinkedIn and Zynga show. In fact, according to the IBM GILD report on FDI, Ireland attracted more FDI jobs per capita than any other country in the world in 2008 – the same year Ireland’s domestic economy tumbled into recession. And as rents and property costs tumble, Ireland’s attractiveness increases.
  • Irish people have a famously small tax burden – all-in rates calculated by the OECD suggest that people on the average salary pay only about 10% of their income in tax (even less if you’ve children), compared to an OECD average of over 20%. Presumably we will normalise this a little bit over the coming years, but Ireland is still a great place to work, particularly if you’re on a low income.
  • Ireland is a hub for internationally traded services. Despite accounting for only 0.05% of world population, Ireland has a world market share in services of about 2.5%. Traded services are a huge growth area for the world economy and Ireland is well positioned to capitalise on this, as it is one of the first countries in the world where more than half of all exports are services.

I’m not saying the next few years are going to be fun or easy. But it’s important we keep our perspective and know which monsters we are fighting and which we aren’t. Ignoring the budget deficit while hyping up the bank bail-out up to the point where it’s apparently going to swallow the Irish worker whole is not the way to do it. Getting things right on public sector expenditure is far more important than NAMA – getting the members of the public sector unions to understand this is the challenge.

  • Which is the bigger worry - NAMA or budget deficit? ,

    […] to Fintan O'Toole's piece in last week's Irish Times on becoming serfs to Anglo and the banks: Irish people no better off now than during Black Death, and other stories […]

    • Shane ,

      Lovely – I agree. Another two statistics to throw into the mix: life expectancy and infant mortality.

      Infant mortality: 93/1000
      Life expectancy: 52 years

      Infant mortality: 4/1000
      Life expectancy: 79

      Thank God we’re past the good ole days. Life now, even in the recession, is better for everybody than it was a century ago. Progress – things tend to improve.

      • Ciaran Daly ,

        O’Toole and Browne are, in my opinion, out and out socialists whose views seem to be followed by a some of the middle class in south Dublin anyway. Their understanding of “equality” is bizarre and tantamount to socialism.

        I agree with a lot of the positive sentiments of your piece above. What I would say though is that if the national debt cannot be kept below 80% of GDP, and the bank bailout doesn’t help, then we will surely go into a debt deflation trap.

        As a matter of principle, surely having to pay off someone else’s debt is on the slippery road to serfdom, a far away place from real serfdom as you say, but in principle, working off a debt you don’t owe is immoral.

        Hayek is always worth a read.

        • Jaded ,

          Sure its not as bad as all that if you still have your job, mortgage rates stay low and the government remains able to fund essential services… Just how long do you think that’s likely to be though?
          Very interesting version of NAMA too btw. Its the very convenient way of calculating the cost which fails to take into account any reality that I would recognize. Keep up the propaganda and soon you won’t be an independent economist. Hell, with this kind of spin you’ll be a certainty for some government, sorry I meant debt funded job…

          • bonjai ,

            Good article as ever Ronan, just a quick question, does the 10% tax rate that the average citizen pays include the rate of VAT paid on each transaction? Agreed the lowest paid in Ireland pay virtually no tax but if someone earning 250K pays the same VAT on a can of beans as someone on social welfare then this surely represents a significant skew on figures and a very regressive taxation system? Surely this is a major problem with regard to the Irish taxation system, that the poor pay the same levy as the super-rich with regard to necessities in order to keep actual income tax low?

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              • Holbrook Fields ,

                Great post, a really clear exposition of the bigger picture and a much needed riposte to the polemics of O’Toole.

                • Ronan Lyons ,

                  “Very interesting version of NAMA too btw. Its the very convenient way of calculating the cost which fails to take into account any reality that I would recognize.”
                  Two things:
                  (1) I’m probably one of the most vociferous critics of NAMA – have a look around this site for previous posts and see if you still think this is ‘propaganda’.
                  (2) How would you calculate the costs of NAMA? I’m interested in constructive criticism.

                  • Ronan Lyons ,

                    Including VAT for Ireland means you’d have to do the same for all OECD countries and Ireland’s rate is more or less in the middle of the OECD, so our huge ‘lead’ in direct taxation would not be altered by including indirect taxation.

                    Thanks for the comment, though – useful to have out in the open,


                    • Mack ,

                      Hi Ronan,

                      Great article! The scale of recurring fiscal deficit appears to be much larger than the total bank bailout cost. So many newspaper articles seem to sloppily add the recap costs to the cost of purchasing the Nama loans and trumpet that as the total cost (ignore that there’ll be at least *some* return on the Nama investment – Constantin Gurdgiev estimated between around €2bn-22bn loss, I presume Alan Ahearne, Brian Lenihan feel it will make a profit).

                      Just a short comment on that – I think the recap costs including Anglo are estimated to come in at €33 bn rather than the €3bn on your graph. Still dwarfed by the fiscal deficit.

                      The software industry in Ireland definetely seems to have turned the corner. Many firms expanding now.

                      • Ronan Lyons ,

                        Hi Mack,
                        Thanks for the comment – as per Nat O’Connor’s original figures, I only included the “deadweight losses” figures for the various items in the graph (his methodology – or possibly even the Indo’s whence his idea came). Therefore, the costs for Anglo recapitalisation are purely the debt-servicing costs, not principal repayment, in the belief (as stated by the government) that the bank will actually be worth something (i.e. what we’ve paid for it) at the end of the process.

                        In truth, as you point out, the lost-and-never-to-reappear money will probably be somewhere between your figure and the one in the graph.

                        • Martin Ryan ,


                          You raise some very important issues.

                          Notably asbsent from popular discussion is the reality that fiscal adjustment and Nama are two distinct processes.

                          I’m worried about delays (and potential barriers) to fiscal adjustment, given the historical lesson of how damaging it can be for the Irish Govt. to finance current expenditure through borrowing.

                          I think you and I (and many others) agree on many things, including the unfairness of Nama; but also the need for fiscal adjustment. For the former to over-shadow the latter is definitely a major disappointment.

                          The NAMA exchange as I understand it (you might clarify) is that the banks give (property-related) loans to NAMA. In return, NAMA gives the banks Irish government bonds. The ECB gives the banks cash in return for the Irish government bonds that the banks have newly acquired.

                          If the performance of the (property-related) loans held by NAMA does not provide enough finance to pay out to the ECB on the bonds that they hold, then the Irish taxpayer must cover the rest of the debt to the ECB.

                          What I am driving at is that this convolution is a hell of a lot different to the standard issuance of government bonds. To cut to the chase, the nuanced ECB involvement in NAMA is lost on those who persist with the idea that “NAMA money” could somehow be used to prevent cutbacks. NAMA money is not available for anything besides NAMA, so to speak.

                          Returning to my concern about delays (and potential barriers) to fiscal adjustment, what I particularly fear is a re-run of the late 1970’s and the 1980’s. The solution back then was the “Tallaght Strategy”. Unfortunately it was introduced years after it was needed; and years after unemployment (and migration) did serious damage.

                          In my view, there is not enough attention being focused on Ireland’s dead-end debt-trap during the 1980’s, when unemployment hit 17%, emigration was par for the course, and the IMF were about to step in. A great reference is “Catching Up With the Leaders: the Irish Hare” by Honohan and Walsh:

                          In my view we never recovered until World Cup ’94. The Tallaght Strategy in 1987 set us on a good path, and things were looking good during World Cup ’90. However, it took the devaluation of ’93 (and the subsequent float of the currency) to really set us off, IMO.

                          We don’t have a currency to worry about now, but there are two lessons from the 70’s/80’s: 1. Do not prop up an overvalued currency (think of sterling weakening in 1986). 2. Do not borrow to fund current spending. There is of course much concern about our property market. We would do well if we can break the obsession with property, and avoid propping up an overvalued (“long-term”) market.

                          Now of course, we need to get the macroeconomics of fiscal adjustment right; and if we don’t my fear is that we could push the unemployment rate closer to its earlier peak of 17.1%. In this regard, another useful reference is Philip Lane’s paper on fiscal strategy:

                          It draws a useful distinction between what one would ideally do, and what one sometimes must do in order to be responsible. The fact is that in 2009 the Government realised it would need to borrow €11bn just to cover day-to-day spending. That €11bn was approximately one sixth of all spending that year, and roughly three times the size of loans that we were paying off. Uh-oh, now we were borrowing to make our loan re-payments; even worse than borrowing for current spending!

                          Furthermore, as the Bord Snip (Nua) report notes, there were fears that the enormous volume of planned sovereign debt issuance (on a global basis) could lead to higher long-term bond rates. As the Greek situation unfolds, that concern about higher costs of borrowing is certainly no fantasy. On the front page of the NYT today, there is a story about Bernanke saying that the U.S. deficit will have to be reigned in:

                          In the Irish case, the projections (that I am aware of) indicate that the cost of paying off our loans will be €11bn in 2013. The overall Govt. deficit was projected to be €20bn for 2009; we now know that it was €25bn. To put that (€25bn) figure in context, it’s getting close to double the amount of money spent on public sector pay.

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                              • M Collins ,

                                Reference Fintan O’Toole: The Irish Times wouldn’t habitually commission an economist or an accountant to write controversial articles on, say, theatre or art, where these are outside their sphere of competence. So why does it regularly publish economically illiterate articles on finance matters, written by a social and arts commentator, however brilliant he may be in those fields?

                                • Ronan Lyons ,

                                  Oh don’t worry, I’ve been reliably informed that it was humiliation rather than the economy which was the point of his article! Perhaps he’s qualified to talk about that?

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                                    • Colm Brazel ,

                                      yeah, the Irish nation is approx 2.5 trillion in debt. Nama experiment is a twisting of market place logic and interference with the market place to our long term detriment. Saving of Anglo is a raid upon taxpayers.”debt servicing costs for the bailout” according to Corrigan of NAMA speaking to the oireachtas yesterday are expanding as we speak.

                                      I found your quote “You could be forgiven for going back to Maddison’s historical statistics and double-checking that, controlling roughly for changes in spending power, Irish people are about 30 times better off per capita than they were in 1820.” particularly amusing given that 1820 was not saddled with our debt obligations.

                                      To argue we are rich while ignoring our borrowings is, frankly, rather sad.

                                      Give me Fintan O Toole anyday over your myopic interpretation of a strictly 2 dimensional world of facts and figures. We live in a 3 dimensional world. Fact is NAMA and saving Anglo plus the balance of payments debt, sovereign debt response has been woeful for Ireland going forward into the future. This is a dynamic situation, the effects of these decisions impact the future and they will come back to haunt us in the future. Its this incremental damage you ignore.

                                      • Ronan Lyons ,

                                        Unfortunately, Colm, there’s no way of having a meaningful discussion as each is going to try and paint the other as not seeing the bigger picture. In the off chance I can reach you, or anyone else who’s reading the comments:
                                        – your €2,500bn in debt is presumably a gross liabilities figure – what’s on the asset side? (Also, sure if we’re €2,500bn in debt another 1% or so on the banks is hardly a problem!)
                                        – the 2010-1820 comparison was income not wealth, so it’s in fact probably the most important statistic if we have to pay back our borrowings (particularly as your method of calculation excludes current wealth!).
                                        – on your point about the situation being dynamic, have a look at the latest figures – Ireland is moving into balance of payments surplus. It’s the government that is in debt.

                                        • Mack ,

                                          @Colm –

                                          Would be good to get more info on that.

                                          According to the Central Bank Ireland has an external debt of €1.1 trillion of which of which the bulk is due to entities trading in the IFSC (€789.1 billion) most of whom are foreign and are not relying on Irish economic activity to pay back those loans.


                                          E.g A foreign bank sets up a subsiduary in Dublin and (perhaps because of laxer regulatory standards) books some of its debt in Ireland. Whether the firm pays it’s loans back (which were possibly borrowed and spent outside this state) shouldn’t really affect us.

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                                            • Joseph ,

                                              Ronan – “The bad scenario is where this doesn’t happen (sound likely?!) and the current deficit of about €19bn persists until 2014.”

                                              What happens then?

                                              How does this tie up with what Damien Kiberd was saying in the Sunday Times today? Are your figures and his in synch?

                                              He’s saying we will have a gross national debt-to-GDP ratio of up to 120% in 2011 and I think he’s saying that based on the government cutting its deficit from 12 to 3% of GNP (though I presume that won’t actually happen until 2014 if it happens at all).

                                              • Cathal ,

                                                Excellent article Ronan. You have written a great riposte to the jeremiads who have seized on our current woes to predict that all we have is going to be lost.

                                                These people seem to have forgotten that countries have encountered much worse recessions than even ours. Why even now Ireland’s recession isn’t the worst – Estonia and Latvia have seen larger declines. Moreover, Ireland’s recession is merely one of a series which have occurred over time. Indeed Finland’s collapse after 1990 and the Asian crisis of 1998 were worse than what we are experiencing now. Those countries recovered and so will we.

                                                Furthermore, you mention that it is government debt which is the problem, not the costs of NAMA, and I would agree with that given that, as you illustrate, the numbers are so much higher. However, at the same time the Irish government is piling on debt, Irish households and businesses are paying it down. Irish personal debt will fall by about 15% of GDP over the next 5 years as we de-leverage. This will balance out the rise in public debt and lead to us being a net lender to the world.

                                                In finality, while Ireland is facing similar issues on the bond market to Portugal, Greece, Italy and Spain; we are unique amongst that group in our openness to the world economy. We are also unique in our productivity, our flexibility and our quality as workers and entrepreneurs. None of those countries have as favourable demographics as us. It is because of these distinguishing characteristics that we are far better placed to grow our way out of recession than these other countries.

                                                • Pat Donnelly ,

                                                  These figures , in the graph, frighten me!

                                                  How do you think we can pay back such tremendous sums?

                                                  I expect the msm to make great play over the next few years, of every EZ country’s weakness. It will help to devalue the Euro. The debt will be reduced by this process? Beggar thy neighbour is not attractive, but will it be effective?

                                                  In one sense the protaganist is correct as we are saddled with massive debt that will require generations to work off. NAMA, we agree is a waste of capital. I would love to beleive that so little will be lost to this venture, designed to enable us to enhance our ability to borrow more and more.

                                                  Was that not how this generational problem was contracted? How does debt free us?

                                                  • Harry Rubin ,

                                                    This is a very well written article and shows a good grasp of the high level picture of the economy. Your Anglo estimates are too optimistic. At least 20bn is going down that hole.

                                                    I am very impressed with your analysis in general and I think you have a fine career ahead of you!

                                                    • kevin denny ,

                                                      O Toole’s piece was obviously very rhetorical, I don’t think you should be too hard on him or take him too literally. It was expressing anger at the mess we’re in. As long as he is not emigrating himself he can’t think its that bad.
                                                      I share the concern about an Arts writer talking about economics matters but clearly neither Fintan nor the IT sees him in such a narrow role.

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                                                        • john ,

                                                          well now really with all the facts we are not that bad of people really

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