Do We Invest Our Way to Recovery or Cut Our Way Into Receivership? The Recession Diaries - October 8th
The biggest criticism levelled at those who argue for an expansionary investment programme to restore economic growth and repair public finances is that we have no money. Yes, it would be a good idea it is conceded but unfortunately we are broke. We have to stick with the current strategy of contraction and cutbacks even if it leads us into receivership and IMF sovereignty.
Well, here’s the good news: we do have money. We have considerable resources. We can turn our fiscal frowns upside down. How much do we have? The IMF’s World Economic Outlook gives us some clue - though, in truth, the ESRI has presented this data in their quarterly commentaries. Let’s go to the IMF data first.
They provide data on Government’s gross debt and net debt. Net debt is not a figure that is used much (which is why the IMF data is helpful). Take a household that has outstanding debt of €150,000 (house, car, credit card, etc.). That’s the ‘gross debt’. But the household also has cash and investments (shares, etc.) totalling €60,000. Their net debt is €90,000 (and that’s not counting house equity, pension fund, or that antique heirloom received as an inheritance but worth a decent bob).
Similarly with Governments which hold cash and financial assets in various funds. The difference between gross and net debt can be considered as ‘cash and assets on hand’ - available to the Government in an emergency. What does the IMF data tell us?
For the Eurozone countries which we have data for (I have excluded Finland as it is an outlier - with cash/assets worth 88 percent of GDP, mostly in social security funds), Ireland is the league leader, well above all other countries. What are these cash and assets? Primarily two:
- NTMA cash balances: this is the ‘cash-on-hand’ accumulated through pre-borrowing - borrowing over and above what is needed by the state for current funding purposes. This is kept as a buffer in the eventuality that there are temporary problems in accessing the international market. It can be referred to as ‘rainy-day account’. At the end of June 2010 cash balances made up €20 billion.
- National Pension Reserve Fund: this is the value of assets (equities, securities, cash, etc.) contained in the fund. A significant portion of this fund - approximately €7 billion - is tied up in bank shares. At the end of June 2010 the discretionary fund (that is, excluding bank capitalisation) stood at €17 billion
These are considerable resources.
This is not an argument for ‘raiding the piggy bank’. A progressive investment strategy must adhere to the fundamental principle: resources should be made available for those investments that we would have to make in any event, regardless of the recession, to boost future productivity. In many instances, therefore, we wouldn’t be diminishing our cash and assets at all, merely re-directing it.
Take, for instance, rolling out next generation broadband to 90 percent of all households and businesses; no one doubts the potential to boost our productivity and enterprise performance. IBEC estimates it would cost €2.5 billion with a full return-on-capital within twelve years. If the Pension Fund got involved in this investment, it wouldn’t be a ‘raid’ - it would mean redirecting investment in foreign assets into this asset. The key point here is that it would not result in a diminution of its asset base.
The ESRI has a lower calculation of our cash/assets on hand. They project:
- 2011: €49 billion
- 2015: €58 billion
If we were to engage in a five-year investment programme of €15 billion (probably on the high side but hey, its an emergency and our infrastructural deficits are so profound) we would end up, at the very minimum, with cash/assets on hand of 26 percent of GDP (according to the IMF) or 21 percent of GDP (according to the ESRI). But that doesn’t factor in a ‘redirection’ of investment, which would maintain our asset base. Nor does it count the possibility of leveraging in non-Exchequer funding (public enterprise, private investment, etc.). In the final shake-out, we would find our cash/asset base would have declined by much less - and still be well above the Eurozone average.
So we have the money. We have the need. We have the people to do the work. What’s the hold-up? If you tell me we can’t trust this Government to carry out such a progressive programme, I’d agree. But that’s one more reason to hold an election now.
And a reason to demand that the Opposition parties clarify their position on this issue - do we invest our way to recovery or cut our way into receivership.
Discussion
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Comment by: Pope Epopt
Oct 11th 2010 at 12:10
Can you see the Labour Party publicising this data and this strategy?
Perhaps I missed it, but I can’t.
Comment by: Kof
Oct 12th 2010 at 09:10
Raiding the NPRF should not be done lightly.
The only way I’d be happy with touching it, was if the deficit was corrected severly. I’m talking at least a 50% reduction this year. This would include placing all planned capital expenditure on hold until the fiscal situation improves. Any capital investment during the emergency (such as the broadband upgrading you mentioned) would have to be subject to rigorous cost/benefit analysis.
Also, who would actually carry out the broadband installation? Eircom have already been paid several times over for this task. I wouldn’t be happy with their involvment in this project at all.
The crisis presents us with an opportunity to address the staggering inefficiency and waste in out Government (central & local), public/civil service & quangos. We also need to address the unsustainable social model we have.
We need to grasp this opportunity or we’ll be consigned to limbo land for decades.