Thursday, 5 August 2010

Finding the money

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?


Paul Hunt said...

You're perfectly entitled to view the NTMA as being excessively cautious - given the uncertainty surrounding the cost and availability of funds it's hard to blame them - but there's just one little problem.

Ireland has no divine right to demand that managers and investors of the pension funds (and other savings) of countless workers in other countries should pour more money into a black hole largely of its own making with huge uncertainty about how quickly or how well it may be able to extricate itself. And the risk of a major debt-restructuring in the EZ has not gone away - which would impose losses on their existing holdings of Irish paper.

Michael Taft said...

Paul - pouring money into a black hole? That is happening now with the ESRI stating that the Government's fiscal strategy won't be able to reach Maastricht compliance by even 2020! We have to stop doing what we're doing to ensure that we will be able to continue borrowing. And what we need to do is incease investment, generate jobs, promote growth and start a sustainable fiscal consolidation strategy. You're right - the present course is undermining our borrow capacity.

Paul Hunt said...

I fully realise what's happening is savage and vicious, but there seems to be little recognition of the extent to which Ireland has lost its economic, fiscal and monetary sovereignty. Under the guise of the von Rumpuy task force on economic governance, it appears the EU is working to establish the European Debt Restructuring Mechanism (EDRM). There's bound to be a lot of wrangling and it will all have to go on behind the scenes - too much public noise could trigger a disorderly restructuring (the IMF's public pontification started a rout in Argentina in 2000). It will need a treaty amendment which Croatia's entry next year might facilitate.

In the meantime stripping out inefficiencies and surplus profits in the state, semi-state and private sheltered sectors would help to boost the domestic economy, but that's probably a bridge too far.