Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

This is the people’s economy: Two questions to ask candidates

Sometimes it’s easy to take for granted that I have a readership. With the General Election in Ireland less than ten days away, though, now cannot be one of those times. The majority of the people who read this post will have a vote in next week’s election and some – probably many – are not only undecided about for whom to vote but also keen to learn more about the major issues.

Last December, a few of us economists got together and wondered what could we do to share what we think about Ireland’s economic circumstances and solutions to the problems Ireland faces. The result – after an awful lot of tidying up and de-jargoning – is It’s a store of knowledge, with a glossary explaining economic jargon, a set of questions to ask candidates, answers to economic FAQs and, over the course of this week and next, live web seminars for election candidates, where they can ask economists questions about different economic topics. There is also a Youtube channel showing short videos on particular topics – an example is below.

A couple of months ago, I outlined my thinking about what sort of hole the Irish economy is in, how it got there and it can get out. Given the complex issues involved, it’s a relatively long post but hopefully it explains the key issues. I’m aware, though, that while economists can talk and talk, real people are busy with their lives. So today, I’d like to pass on just two questions I’d recommend people ask their candidates, together with my own thoughts on both questions.

1. What are your plans for making sure those who lent to Irish banks share the pain?

This is the obvious first question. As things stand, it looks like Ireland’s national debt will be about €50bn higher due to the consequences of the blanket guarantee given in late 2008 to Ireland’s banking liabilities. This is money pumped into banks as “recapitalisation”, i.e. closing the gap between a bank’s assets and its liabilities. There is another way of closing this gap, though: instead of increasing the banks’ assets, you can reduce their liabilities.

Putting all the pain on Ireland’s taxpayers is not a fair solution, as they didn’t take this risk to begin with. It’s also clear that, given Ireland’s high non-banking debt, it’s not a feasible solution. The ideal would be to share the pain with those that took the risk to begin with. There are two problems with that: firstly, a large chunk of bondholders have got out of Irish banks already. Secondly, the EU is not interested in that solution anyway and has done two things to prevent that from happening. It has stuffed Irish banks full of deposits (through the ECB). And, through the IMF-EU loan, it lent lots of money to the Irish government so that it can go on recapitalising at will.

Ireland is now stuck. The EU is concerned about not burning bondholders, but the markets are concerned about Ireland’s overall debt levels. Given all that, there is one elegant and in my opinion obvious solution. It is the EU – not Ireland – that is concerned about not making the bondholders pay. The EU has gone off to markets and borrowed to lend to Ireland to do this. If it so concerned, all it needs to do is make those funds available to Ireland at the rate it borrowed at. This is closer to 3% than 6% and would effectively mean “burning bondholders” by 50% domestically, while allowing the EU to protect senior bondholders.

2. How are you going to close the non-banking deficit?

Unfortunately, much as I would like it not to be, the first question is auction politics. It is easy and popular to come out with increasingly strong rhetoric on “burning the bondholders”. I cannot stress enough, though, that in terms of the IMF having to be called in, Ireland’s banking problems only tipped us over the edge: we were already dangerously close to the precipice anyway.

Therefore, the second question is all about not hiding behind the failure of the Irish banking system. We, the Irish people, voted in Governments who promised to tax less and spend more. They did this and now we are left with the largest gap between government spending and government revenues in the developed world. No amount of burning bank bondholders can change that.

The chart below shows the per-month tax bill for the typical household in Ireland, in a balanced-budget scenario. It’s a combined VAT-excise-income tax bill and assumes a 6% interest rate on Ireland’s national debt, which includes an irreversible €50bn due to the banking crisis. The banking debt is significant but it is much less than half Ireland’s non-banking debt and – in per-month terms – only about one twentieth the size of the Government’s current expenditure.

Monthly tax bill for the average Irish household, by item of expenditure
Monthly tax bill for the average Irish household, by item of expenditure

Ireland has a huge deficit to close. The only ways to close this are by more taxation and by cutting current spending. No-one wants to do this, but we have overspent and under-taxed for the past decade. The kind of answers I would like to hear from a candidate will be familiar to long-standing readers of this blog – a top five might read:

  • Bringing income tax credits back in line with other European countries
  • Introducing an annual property tax, based on land value
  • Cutting spending in health, again so we are in line with other developed countries
  • Introducing universal loans-and-fees for third level education
  • Making sure all welfare payments are only reaching those who need it

Thanks for reading this, and please vote if you can.

  • Hugh Quigley ,

    Hello Ronan – your last sentence is arguably the most important, as I believe there are lots of Irish people who are so disillusioned and confused by what the politicians standing for election are offering, that they might not bother to vote at all. Or worse still vote on the basis of sound bites or extremist views.
    A suggestion for the undecided or “All politicians are the same” voter: make a list of the candidates that you dislike the most and work backwards up the list. That way you will arrive by default at your number one, two and three.
    And then having voted, you can legitimately complain about the next Government and the actions it takes to shape our economy and country. Everyone’s vote counts and the polling station is one of those few places where no one else can tell you what to do.

    • John Mack ,

      Excellent clarity, sensible approach. When Sarkozy, whom I dislike, accused Ireland of following the “American model” he probably meant, among other things, cutting taxes while increasing government spending, thus piling up dangerous levels of public debt that would sap the economy. He also probably meant lax regulation of businesses, especially the banks. American neo-liberalism is a total failure. Unfortunately in the US we will probably be unable to undo this policy. But in Ireland you can and you must.

      The thing to emphasize is that taxes must be raised to pay off the debt that the Irish people themselves (not the badly managed banks), through their elected representatives, are responsible for. This kind of commitment to payment is fair, and the Irish people, and we observers from abroad, above all have been asking for fairness.

      Cutting spending is also fair, and must be done in a fair way. Your broad suggestions define where fair cuts can be focused.

      Why not invite the candidates too answer to a panel of you four on TV? (then YouTube). You are not “burners,” you have learned to speak lay economics, and you will be able, in this forum, to give a fair chance for sensible solutions to be heard – from the candidates for office.

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        • Ronan Lyons ,

          Thanks for the comments so far (and for those wondering, no I haven’t switched from Oxford to Cambridge!).

          • Shane Gleeson ,

            Hi Ronan, could you expand on the last point in Q1? Cant get my head around it: “This is closer to 3% than 6% and would effectively mean “burning bondholders” by 50% domestically, while allowing the EU to protect senior bondholders.”

            Great post btw!

            • Steve Daley ,

              Hi Ronan,

              Great post. Your figures imprint very clearly the dire state of the public finances and give a really compelling visual description of the relative costs of state spending for each citizen. But I do not share your interpretation of this.

              Your explanation of the deficits is pretty weak IMHO. You forget the key driver of any economy is growth. The key problem in Ireland is that economic growth has been fuelled by government spending, a credit bubble and a boom in consumer spending. It is the absence of productive outlets for capital in the real economy that has us in this mess. The policy hubris of Irish govts is not pro-cyclical spending, but their evasion of the structural weaknesses of the private sector by hoping to grow an economy by consumption alone.

              I wrote about this in more detail on Feel free to add your comments.

              • Steve Daley ,

                For readers of this blog, the 2 questions you should ask every candidate who knocks on your door are:

                1. Do you believe state spending can save the economy?

                2. How do you propose to restructure the economy to expand domestic productvity not resell value?

                Comments welcome at IrishQuestion

                • Johnny Waldron ,


                  Great distillation of our economic challenge into two sharp questions. The data in your second chart are very powerful. Previously unimaginable debt numbers which bamboozled the financially traumatized electorate are immediately understandable when presented on a household basis.

                  Could you send me a copy of the data so that I can tinker with the presentation?

                  Great work!


                  PS: Glad to hear that you remain a dark blue

                  • Ronan Lyons ,

                    Hi Shane,
                    That’s well spotted – I was talking this post through with someone and I realised I short-cutted this point significantly by just giving the start and end. Effectively the only reason we want to “burn bondholders” is to reduce the national debt associated with the collapse of the Irish banking system. If we “burnt” them by half, say, instead of €50bn debt, we would have €25bn debt. This would halve our annual interest repayments.
                    The same thing could be achieved by halving the interest rate involved, without touching the amount. While this sounds like a cheat, it’s worth remembering that, because countries live forever and grow, it is almost never in a country’s interest to pay back the principal on national debt (which is why none ever do). All you need to do is service the debt, hence the ability to achieve what we want (halve the cost of the bank bailout) through a different channel.

                    Thanks one and all for the comments.

                    • Michael J Connolly ,

                      With all the negative comments about the banking sector and so called corrupt people has anyone calculated what the banking sector has paid in taxes, levies etc to the state since 2000?? Also what dividends have been paid out to Irish shareholders and again what taxes have been collected on the dividends??

                      I wonder what the net position really is !!!???

                      • John Mack ,

                        According to Brian Lenihan’s latest messenger boy statements, the ECB is adamant: no negotiations on anything. In effect, “Your government stuck it to you. Then we stuck it to you. Now live with it. You elected those bozos, not us. Age viriliter.”


                        … Can Lenihan’s statements be trusted?

                        … If Europe is adamant, what advice would you give the new Irish government?

                        • Finbarr O'Mahony ,

                          Hey Ronan, nice post. Quick question:

                          “Introducing an annual property tax, based on land value”.

                          My concern with this would be retired folk who had bought their property when prices were much less than they currently are, even post bubble. Could this be implemented in a way that ensure that they won’t be forced to sell their home to pay the tax based on the new value?

                          • Ronan Lyons ,

                            Hi Finbarr,
                            There are two ways of doing this:
                            (1) Deciding as a society that we don’t want to include citizens over a certain age in this, and giving them an exemption.
                            (2) Acknowledging that older people may often be in a situation of sitting on a lot of wealth (their property) but being at the same time income-poor, and deferring all tax liabilities until their death.
                            There is no right answer, but if we don’t tax some homes, we are just increasing the tax burden on other homes. There are no easy ways out of this.
                            Thanks for the comment,


                            • Seamus Coffey ,

                              Hi Ronan,

                              Nice post. Looking at the graph suggests an average monthly tax bill of about €2,800 per month or nearly €34,000 per year!! That’s a respectable income, not a tax bill. Just shows the scale of the expenditure problem we face. We either have to raise taxes to fund it, or cut expenditure to match our revenue. The fiscal deficit has got lost in the GE campaign and has the potential to be a bigger problem than the banks ever will be.

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