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The Irish State, burdened with a heavy debt overhang from the boom and bust, and still running a deficit, can nonetheless borrow at historically low interest rates. The reason is the willingness of the European Central Bank (ECB) to act, at least until next March, as a buyer for eurozone sovereign debt.
Each month, the ECB is buying €80bn worth of bonds, mainly government issues, from all eurozone countries (except Greece) and already owns €12bn worth of Irish debt. Without this backstop. the Government would be paying higher interest on fresh borrowing and would find it harder to get the budget into balance. The economy is expanding impressively anyway so there is no need for a debt-funded boost to activity. Even if there was a case for a bigger deficit, there are new European rules designed to restrain over-indebted governments from borrowing.
Borrowing money
Regardless, the Government seems hell-bent on finding a way to spend more, either by getting the European Commission to relax the rules or through a wheeze called off-balance-sheet financing. In this ambition, they are supported by all opposition parties. Indeed, all 158 Dail deputies elected in January seem to agree that more borrowing should somehow be engineered.
If the Commission relaxes the rules this will be presented as a triumph and spending will increase faster than already provided for. But note that the Commission will not be granting the money – it will have to be borrowed, added to the state debt as measured by Eurostat and becomes a further liability to be serviced and re-financed in the years ahead.
The off-balance-sheet wheeze exploits weaknesses in the way Eurostat does the numbers. If the borrowing is done by certain types of state agencies, for example commercial state companies, it is not counted as state debt, although the ultimate liability inevitably returns to the state if things go wrong. Think of it as borrowing via an out-of-work teenage offspring who needs a parental guarantee.
Borrowing off the balance sheet costs extra and fools nobody except Eurostat, who are not the guys who lend the money.
Under sensible accounting rules this manoeuvre would not be allowed, and you would be required to show all borrowings on a consolidated basis.
The Eurostat rules can be circumnavigated because the debt measure is flawed and a cottage industry of accountants, lawyers and civil servants has grown up to help politicians play the system. Unfortunately the interest on off-balance-sheet borrowing, via state agencies or structures such as public/private partnerships, tends to be higher than on straight government debt, so the subterfuge has a cost. Potential lenders to government will, if the going gets rough, discover quickly where the debts are hidden and get scared. Borrowing off the balance sheet costs extra and fools nobody except Eurostat, who are not the guys who lend the money.
Credit-worthiness
There is a further snag. The current low interest rates on government borrowings are not a true reflection of the credit-worthiness of the more indebted eurozone governments. They reflect rather the belief that the ECB will remain a buyer of last resort of government bonds for quite some time, but the commitment runs out in March next year. It could be extended but it must end at some stage.
When it does, the cost of government borrowing will rise and the real risk is that higher borrowing costs could coincide with the next economic slowdown here. Getting the deficit down to zero (the original target was for this to have happened last year) is a kind of insurance policy against things going less well at some future point.
Ireland is unusual among eurozone countries in that there has been a decent spurt of economic growth these last few years. There are quite a few experiencing near-zero growth which could do with a relaxation of budget policy. But the textbook procedure is to avoid fiscal stimulus when things are going well and keep the powder dry to deal with any future upset.
Brexit vote on Thursday
Unfortunately the impression has been created in Ireland that economic success should be the trigger for a boost to public spending. With large legacy debts to be serviced and refinanced, this is a risky strategy and the reverse of common sense. Britain votes on Thursday on its continued membership of the European Union and the result should be clear early on Friday morning.
What would a Brexit mean for Ireland?
An exit would have major consequences for Ireland, and particularly for Irish agriculture. But a narrow win for the Remain side would have consequences too. It seems to take something like a 60/40 result in a referendum to really settle an issue and the 55/45 vote in Scotland against quitting the United Kingdom did not settle that issue “for a generation”, as David Cameron declared at the time.
A narrow win for Remain will leave deep divisions in British politics and embolden eurosceptic parties elsewhere to seek their own referendums.
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