Two recent analyses of Ireland’s economic situation have made for sobering reading.
Writing in the Irish Times on Saturday under the headline ‘Burden of Irish debt could yet eclipse that of Greece’, UCD economist Morgan Kelly said that unless the Government abandoned the bank bailout the country faces bankruptcy.
Kelly, who correctly predicted the bust several years ago, said in his article that while on the face of it Ireland’s debt position does not appear “catastrophic”, when the costs of the bank bailout are factored in the national debt could hit 115pc of GDP by 2015, “if we are lucky”.
He warned that in the face of a borrowing crisis on the international markets, Ireland could end up with a deal whereby the European Central Bank buys Irish debt and provides continued emergency funding to Irish banks, in return for the country agreeing to a schedule of “reparations” of 5-6pc of national income over the next few decades.
These reparations would require swingeing cuts in spending and social welfare and “unprecedented” tax rises, Kelly suggested.
“A central part of our ‘rescue’ package is certain to be the requirement that we raise our corporate taxes to European levels, sabotaging any prospect of recovery as multinationals are driven out,” he added.
However, a spokesperson for the Department of Finance told the Irish Times over the weekend that Kelly’s analysis was based on serious inaccuracies.
Celtic Tiger a ‘mirage’
There was an analysis of a similarly gloomy nature by Dr Peter Boone from the London School of Economics and Simon Johnson, a former chief economist at the International Monetary Fund, in the New York Times last week.
According to the two economists, Ireland’s problems are “sadly, far deeper than the need for simple fiscal austerity”.
“The Celtic Tiger’s impressive reported growth over the past decades was in part based on its aggressive attempts to help major corporations in the United States reduce their tax bill,” the article said, adding that roughly 20pc of Irish GDP actually represents “profit transfers” which raise little tax for Ireland and are owned by foreign companies.
Boone and Johnson also said that Ireland’s politicians, “rather than facing up to their problems, are making things ever worse”.
“The government has now made a fateful choice: rather than make creditors pay some part of the losses, it is taking the bank debt onto the national balance sheet, effectively ballooning its already large sovereign debt. Irish taxpayers are set to be left with the risk of very large payments to make on someone else’s real estate deals gone bad.
“There is no simple escape, but if the government hopes to avoid a sovereign default, the one overriding priority should be to stop bailing out the banks. Instead, the government should wind down existing banks in a ‘bad bank’, while moving their deposit base and profitable businesses into new, well-capitalised banks that can function without a taxpayer burden. This will be messy, but it is far better than a sovereign default,” Boone and Johnson suggested.