At the start of every New Year this column does a state of the nation assessment with predictions for the coming 12 months. This year, more than ever, such an exercise is relevant since we have just exited the IMF/EU bailout program and regained our economic sovereignty.
We are moving away from the most humiliating period we have been through since the foundation of the state. The shame of being unable to pay for the day to day running of the country without having to be rescued financially by the IMF and Europe is not something we are going to forget in a hurry.
The problem began back in 2008 as our boom turned to bust. The collapse of the property market meant we were in deep trouble. So much of our tax had come from property that when the bust happened the state’s revenue collapsed as well.
Our budget deficit climbed as the cost of welfare for the unemployed soared. And cutting state spending enough to match our very reduced level of revenue seemed impossible without causing major social unrest.
The banks were an even bigger problem. They had lent so much on property they were insolvent, even if we did not realize it at the time when we gave them a blanket state guarantee at the end of 2008.
The black hole in the banks eventually became so huge that the state guarantee began to drag down the country. By the end of 2010 we were fast approaching the point where we would not be able to pay the teachers, doctors, police and everyone else on the state payroll, and welfare payments would dry up.
The international money markets realized the game was up and they stopped lending to us. The collapse of the state was about to happen.
So finally we dropped the pretense, and in November 2010 we took the IMF/EU bailout to keep us going until we could sort out the mess. We had no choice -- no one else would give us money.
The cutbacks and tax hikes had already begun in 2008, and they continued into the bailout program, getting more and more difficult each year. The bailout billions came with an austerity program to get our finances back in order, and austere it certainly has been.
By the end of 2013, under Troika guidance, we had managed to restore some order to the state’s finances with the budget deficits coming down, and we exited the bailout program on time and on track at the end of December.
So we start 2014 once again in charge of our own finances, without the quarterly visits from the Troika to tell us what to do.
This has been presented as a major achievement by the present government, and it is something that gives people some satisfaction after all the financial pain we have been through.
But the truth is, as we have been pointing out here, this is only the beginning. We still have a mountain to climb.
Being out of the bailout means that once again we are completely reliant on borrowing from the markets to finance the state. And on that score, the start of 2014 has gone well for us with Ireland’s first post-bailout bond sale last week raising €3.75 billion in the markets.
In fact the bond offering was more than three times oversubscribed, with offers totaling €14 billion coming in, which reflects how much our international reputation has recovered.
The icing on the cake last week for our Minister for Finance Michael Noonan was him being named European Finance Minister of the Year by the Financial Times magazine The Banker, which gave him the award for our bailout exit and successful re-entry into the bond market.
So is everything in the garden rosy for 2014 and the years ahead?
That’s what you would think from the celebratory noises coming from the government last week, with some ministers even hinting that easing off on taxes might be possible soon. The reality is rather different.
For a start, it’s a bit strange to be clapping ourselves on the back for being able to borrow more money on the markets again. An ability to cut spending and eliminate the budget deficit and thereby remove the need for more state borrowing, now that would really be something to celebrate. But we’re still at least five years away from that.
The vague talk of tax cuts is inspired by the local and European elections that are coming up soon which are seen as a sort of mid-term test for the government. But it’s only talk.
The truth is we can’t afford to lower taxes and we can’t afford to increase spending on services. Despite all the tax hikes and spending cuts over the past few years, we still had to borrow close to €1 billion a month in 2013 to keep the state ticking over.
In 2014, if we stick to the Troika plan, that should be down to €8 billion in borrowing for this year. But if we start easing taxes and increasing state spending that won’t happen.
And if the markets see that we are slipping off the straight and narrow, they might well decide that we are becoming a risky bet again.
The unpalatable truth is that without spectacular growth in the Irish economy over the next five years, which seems unlikely, there is no easy way out for us, no way to avoid the high tax burden and the spending cuts.
In 2014 we have to reduce the deficit by another €2 to €3 billion. To achieve that we will need more austerity, not less.
Over the coming year people here will be paying twice the property tax we did in 2013, we will soon start paying for water and there are predictions that all utility bills and other household costs like family health insurance will be more expensive. The burden is not going to ease.
There are two ways the government can do something about this. The first is to slash the size of the state machine to make it lean and mean. But there is no sign that’s going to happen.
After being in the wilderness for so long, the government parties are enjoying their time in office too much to do that. So the vast army of people on the state payroll -- particularly the upper elite — remains largely untouched.
Among them, there is a cavalier attitude to state money. So while most ordinary people are being relentlessly squeezed by taxes of all kinds, these guys still throw around the money.
An example which has caused outrage here was the revelation last week that our new national water authority has spent an incredible €50 million on consultancy fees since it was set up last year to take over from all the local councils that now run our water services.
Given that it never stops raining here and we have a wealth of lakes and rivers, people here resent having to pay for water anyway. This has destroyed the government’s credibility on the issue, no matter how much they talk about all the new pipes and treatment plants we need.
But that’s what these guys do. They find themselves big offices in the city center and then they hire consultants on astronomical hourly rates.
And it has now emerged that one of the consultancy firms involved was involved with Anglo Irish Bank before its collapse! That is just one example.
The fact is that there has been very little reform of state spending here along the lines proposed by the Troika. Health spending is out of control, with senior doctors earning huge money. Lawyers are still making a fortune at the expense of citizens, businesses and the state.
And there are many other areas where vast sums of money are being wasted on fees, salaries and expenses, the cost of which frequently comes from the state.
Yes, it’s sounds great that the Troika is gone and we have our economic sovereignty back. But there are many people here who wish they had stayed another few years to teach our politicians how to run the country.
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