Writing in today’s Irish Times about the upcoming budget, Pat McArdle states
the first thing to do is to try to disentangle the two crises that confront us, namely, the bailout of the banking system and the budget. The two are inextricably but incorrectly linked in the public mind.
He is highly critical of people who suggest there is any such link and the piece includes the now-standard McArdle swipe at academics who “should know better.”
McArdle’s principle objection is to those who see any link between the €4 billion injected into Anglo Irish Bank this year (and perhaps a similar amount next year) and the €4 billion in tax and spending adjustments scheduled for the upcoming budget.
Pat argues that there is no connection between these two sums because, while the money injected into Anglo is part of the Exchequer Borrowing Requirement (EBR), he doesn’t like the EBR. Instead, he prefers to focus on the General Government Deficit (GGD). And the GGD won’t count the money injected into Anglo:
If the exchequer were to inject another €4 billion capital into Anglo Irish Bank in the morning, this would increase the EBR by an equivalent amount but would have no impact whatsoever on the GGD.
This is because the international rules treat such capitalisation as a “below the line” transaction, i.e. investment in a commercial State body which is outside the government sector, rather than current expenditure which affects the deficit.
So there you go: The Anglo money shouldn’t count as debt because it’s being used to fund “an investment.”
I disagree with McArdle’s position on this issue for a number of reasons.
First, it is well known that Anglo is no longer a commercial operation and that the government will get back none of the €4 billion that was put in this year, nor is likely to get back what it will put in next year. To state that the €4 billion invested in Anglo shouldn’t count as debt because there is a corresponding asset being acquired is to engage in exactly the type of disingenuous argument that McArdle accuses others of.
Second, McArdle believes that GGD is the “critical measure” of the stance of fiscal policy which is the “ultimate focus” of government policy because it is used by the EU to monitor compliance with the Stability Growth Pact. I do not agree with this.
The Irish fiscal situation has deteriorated to the point where upsetting our EU partners by failing to comply with their latest interpretation of the SGP will be the least of our problems. The task for the Irish government now is to convince international financial markets (not the EU) that it can set the public finances back on a path towards long-run solvency. If it cannot do that, funding from international markets will be cut off and then we’ll see what a crisis really looks like.
And this is where the cost of the banking bailout comes in. Every euro of debt obligations issued in the name of the Irish taxpayer pushes us closer to the point where international financial markets start to question our long run solvency. And sovereign bond markets are well aware of the costs to the Irish taxpayer of the banking bailouts, irrespective of whether some statistician includes them in the GGD or not. These costs are substantial. Beyond the huge amount of funds being plugged into Anglo, we will have to see how much is ever returned from the €7 billion injected into AIB and BOI or whether NAMA breaks even.
The fact is that the banking crisis has substantially narrowed the options for the Irish government on the fiscal front. With serious international concerns about our ability to pay back the debts associated with both ongoing deficits and the banking crisis, the government has no choice other than to start making major inroads into the deficit.
Third, I would note that even by the official definition of what is counted in the GGD and what isn’t, the call that the money that has gone into Anglo shouldn’t count as part of the GGD seems to be a dubious one. Here’s a link to the ESA95 documentation on this issue. Now go to page 58 of the PDF file. It’s the first page of the section discussing the appropriate accounting treatment for capital injections in public corporations. The section distinguishes between financial transactions, which should not count against the deficit, and non-financial transactions, which should count against the deficit. Non-financial transactions are described as follows:
Acting this way, the government expects nothing in return in terms of dividends (most of the time the enterprise receiving such transfers does not pay dividends), nothing else than an improvement of the corporation’s wealth and the meeting of some social needs
I would argue that this describes the Anglo capital injections pretty well and so they should count against the GGD. It will be interesting to see if, after the NAMA transfers, the government can continue to claim that Anglo capital injections don’t count against the GGD.
The bottom line here is that substantial amounts of public money are going into the banks at the same time as taxes are being raised and public expenditure is being cut. The public may not understand ESA95 but they know what they are seeing with their own eyes.
It is, of course, clear that the deficit would need to be cut even if there was no money going into the banks but McArdle’s claims that there is no connection between the bank bailouts and the severity of the fiscal crisis are, to my mind, extremely odd.