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 progressive-economy.ie 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.
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.