Off-Balance Sheet Delusions

This morning’s Irish Times contains a report that Irish pension funds have “indicated to the Government” that they “would be prepared to invest up to €6 billion over the next three years in a range of State infrastructure projects” under a plan “devised by the Construction Industry Council.”  This would take the form of a specially issued government bond:

The funds would receive a return on their money over a period of possibly 20-25 years at a rate superior to that paid on Government gilts – possibly 2.5 percentage points above the rates offered for gilts.

The news article and accompanying commentary piece are wildly enthusiastic about the proposal. We are told that it is “innovative”, that it would be a “win-win situation for construction and the state”, that it would “protect about 70,000 jobs” and, that “after months of relentless bad news this proposal should be welcomed.” Best of all, we’re told that

it would sit “off balance sheet” and not count towards the crucial debt-to-GDP ratio, which has to be agreed with Brussels.

On RTE’s Morning Ireland, further support for this plan came from Fine Gael finance spokesman, Richard Bruton, who quibbled only that it didn’t go far enough.  He instead put forward FG’s plan to spend €11 billion on energy, environmental and communications  projects, funded by the Pension Reserve Fund and off-balance-sheet borrowing by a new state utilities agency, as a better approach.

This all sounds like good news—potential for bipartisan agreement on innovative ways to stimulate the economy.  However, it is my opinion that these plans are bad ideas that are being mis-sold to a public desperate for positive proposals to “do something” to help the economy.  Let me spell out a number of reasons why I take this position.