"The Very Bad Luck of the Irish"

Peter Boone and Simon Johnson rip into our Government’s economic policy.

[…] The remarkable success of this tax haven [Ireland] means that roughly 20 percent of Irish gross domestic product (G.D.P.) is actually “profit transfers” that raise little tax for Ireland and are owned by foreign companies. Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are lightly taxed; they should not be counted as part of Ireland’s potential tax base. A more robust cross-country comparison would be to examine Ireland’s financial condition ignoring these transfers. This is easy to do: a nation’s gross national product excludes the profits of foreign residents. For most nations, gross national product and G.D.P. are near-identical, but in Ireland they are not.

When we adjust Ireland’s figures accordingly, the situation is dire. The budget deficit was about 17.9 percent of G.N.P. in 2009, and based on European Commission projections (and assuming the G.N.P.-G.D.P. gap remains the same) it will be roughly 14.6 percent in 2010 and 15.1 percent in 2011, while the debt-to-G.N.P. ratio at the end of this year is expected – by our calculation – to be 97 percent, and 109 percent at the end of 2011. These numbers make Ireland look similarly troubled to Greece, with a much higher budget deficit but lower levels of public debt.

Ireland’s politicians, rather than facing up to their problems, are making things ever worse. Simply put, the Irish miracle was a mirage driven by clever use of tax-haven rules and a huge credit boom that permitted real estate prices and construction to grow quickly before now declining ever more rapidly. The biggest banks grew to have assets twice the size of official G.D.P. when they essentially failed in 2008. 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’s a lot more in the post itself. For the few non-econowonks out there these days; Boone is chairman of Effective Intervention, an economics charity, and a research associate at the London School of Economics’ Center for Economic Performance. Johnson is former chief economist at the International Monetary Fund.

Thanks Bertie. Thanks Charlie. Thanks Brian.

The piece, of course, constrasts greatly with Gillian Tett’s piece in the Financial Times last week.

[…] Hence the fact that it was Portugal and Spain, not Ireland, hogging the headlines last week.

Why? Part of the explanation lies in Ireland’s underlying economic situation, which is not as bad as that of Greece or Portugal. Net debt to GDP, for example, in Ireland is projected to be about 50 per cent next year, half the level of Greece. But numbers alone do not tell the whole tale. There are two other, less tangible factors that appear to have played a role in the Irish story – and which are also influencing the way international investors look at government bond risk.

One of these is the issue of political infrastructure or, more specifically, whether a country has the decision-making machinery in place to cut debt. The second is a question that financiers rarely worried about before: namely, social cohesion, and whether a government is able to impose tough choices on a society without sparking political instability, social turmoil or worse.

Make of each what you will.