Michael Taft: Even before the Live Register figures were released, Tom O’Connor put forward a powerful critique of the Government’s failed fiscal strategy when being interviewed on the recent Exchequer returns on Morning Ireland. As he, and so many others on this blog, have emphasised – it’s about investment, it’s about jobs. Get those right and you’re on the way to sustainable fiscal consolidation.
After Tom, it was Senator Dan Boyle’s turn to comment. Sen. Boyle is on record as questioning the desirability of continuing with deflationary policies after Budget 2011. And he appears to be open to arguments for increasing economic investment which means, for the time being, public investment. However, while discussing the stimulating effect of the Government’s recent capital expenditure review, Sen. Boyle stated:
‘But to get even more money for stimulus in the economy means borrowing that money. First of all, there is questions about the capacity to borrow that money and, secondly, the cost of borrowing that money.’
No, money for stimulus does not necessarily mean more borrowing. A partial solution may be to source funding from money what has already been borrowed. Let’s look at the Exchequer cash balance or the liquidity buffer. This is the money that the Government has on hand to protect itself in against volatility in the international markets.
The Government has approximately €20 billion on hand, representing approximately 12.6 percent of GDP. This is a large buffer (in pre-recession years, the buffer was 4 percent). That we need a large buffer now is incontestable and fair dues to the NTMA for starting its pre-borrowing drive in late 2008 in anticipation of more difficult times ahead. However, this large buffer comes with a cost. One of those costs is highlighted by the ESRI:
‘It [the Exchequer cash balance] means that, unlike some other governments, the Irish government, through the NTMA, has considerable flexibility in terms of when it borrows on financial markets and through what instruments. However, this cushion of liquidity comes at a price. The Irish government is currently holding around €20 billion in cash or on very short-term deposit. This asset attracts only a small interest payment. However, the funds to provide this liquidity have been borrowed at an interest rate of between 4.5 per cent and 5 per cent. Thus the total “excess” interest payments could amount to around €800 million . . . ‘.
So to hold this amount of money costs us €800 million. That’s the first cost. But then there’s the opportunity cost. The Government has cut (and will continue to cut in real terms) capital investment – investment that would both get people back to work, increase tax revenue, cut unemployment costs and increase future productivity. We have maintained a high and costly buffer while effectively cutting employment. Is this rational?