The contrast between the UK mini-budget and our own government’s 2023 budget just five days later could not have been greater.
Both shared a desire to pump big bucks back into homes and businesses to weather the cost-of-living crisis, but that’s as far as the similarities go.
The Irish government’s €11bn spending and tax cut budget might be criticized by some as not going far enough.
However, Britain’s £45 billion tax cut package went too far without any solid analysis behind it.
The Chancellor’s budget will do more for households and businesses with their energy bills through a price cap, but it’s being paid with money the Treasury doesn’t have.
The UK is expected to borrow around £190bn to fund energy price caps and tax cuts. The Irish government’s budget is fed from one of the few budget surpluses in Europe. Even after the big giveaway, the government expects another surplus next year.
Looking at a list of 29 European countries, Ireland was one of just five to have a budget surplus in the first three months of this year. The others were Switzerland, Luxembourg, Denmark and Lithuania. All others ran deficits.
The government has taken few risks with its €11 billion budget. The real danger is that it has become too dependent on the €20 billion in annual corporate tax revenues that could plummet in a few years.
There is also a risk of too many permanent spending actions based on potentially temporary corporate profits.
British Prime Minister Liz Truss and her new cabinet have learned the hard way how quickly international market sentiment can turn against an economy, even as big as Britain’s.
We know this all too well in Ireland, having endured the ‘shock therapy’ of an IMF bailout and several years of reconstruction. But we have to rebuild.
Nowhere is this clearer than in the numbers from the NTMA, the agency that manages our national debt. It announced last week that it would withdraw from taking on new debt in the market this year because it no longer needed it – it had borrowed what it needed.
The €7bn raised this year – mainly to refinance old debt – was complete and much less than the €10bn to €14bn the government said it needed earlier in the year.
Ireland’s national debt remains enormous. As a percentage of the value of our real economy – if you factor in the steroid effect of some multinational activity – it’s almost identical to that of the UK at around 101 per cent of economic output.
But the UK government wreaked havoc on its bond market by announcing massive tax cuts. This was because they did it with unconfirmed costs at a time when interest rates are rising, their currency is depreciating and part of their debt interest payments are linked to inflation.
The NTMA, on the other hand, has exceptionally managed our €240 billion sovereign debt profile from a very bad situation a decade ago. It has taken advantage of incredibly low interest rates over the past decade to fill its boots with cheap money.
The vast majority of Irish debt is at fixed rates at an average cost of just 1.5 per cent. Due to Covid and debt repayments, Ireland has borrowed 48 billion euros since 2020. At least it was an average interest rate of just 0.26 percent. Different bonds have to be repaid at different times. On average, the repayment date is in almost 11 years.
Unlike Italy, Ireland has a history of making some very difficult budget decisions when things have gone wrong. We even paid out on Anglo Irish Bank bonds when they collapsed with a €25 billion deficit. It sent a clear message that rightly or wrongly these guys will always pay.
It is also ironic that at a time when the UK is suffering from underwriting huge new loans, the Brits were the ones who gave Ireland the cheapest loan at the time of the financial crash. They lent us more than 2 billion euros at a lower interest rate than the EU, the IMF or anyone else.
The Kwasi Kwarteng car crash budget helped the Irish government deal with concerns that they were not doing enough to alleviate the cost of living crisis. It was the obvious consequence of having a country across the water throwing around borrowed money to secure a populist outcome that backfired spectacularly.
But our government has to be careful. There is absolutely no room for hubris. A third of all our tax revenue comes from a combination of 10 multinational corporations and 500,000 income taxpayers. The corporate income tax of the top 10 multinational companies is 1 euro for every 8 euro the government takes in.
The economic recovery from Covid has been something of a miracle. We have 200,000 more people working than before the pandemic, but we have to remember that this has been paid for by a handful of multinationals, mostly from the US.
Similarly, the NTMA has refinanced many expensive loans at much lower interest rates over the last several years, but we have yet to pay a single euro to reduce this national debt. The total amount owed will not decrease.
Just as major pharmaceutical and technology multinationals have moved €600 billion worth of intellectual property to Ireland in recent years, they may be moving some of it back.
It wouldn’t even require a single truck – just a couple of lawyers, an accountant, and the pressing of a few buttons on a computer keyboard.
Perhaps the last two governments were lucky with public finances. Perhaps the NTMA used low interest rates, its skills and its relationship with the bond markets to transform public finances, which got us 10 years.
Or perhaps the painful decisions of a decade ago helped put the country in a better position as it heads into what appeared to be a very bumpy ride. If there’s anything to learn from the Kwarteng chaos, it’s how quickly things can turn around.
https://www.independent.ie/opinion/comment/hard-lessons-learned-a-decade-ago-shield-us-from-making-the-same-economic-mistakes-as-the-uk-42031229.html Hard lessons learned a decade ago keep us from making the same economic mistakes as Britain