One way or another you will pay for running Irish Water

The fiscal fudge indulged in by the Government over charges will have economic consequences

It now looks very likely that Irish Water’s debts will be included in the national debt. Photograph: Getty Images

It now looks very likely that Irish Water’s debts will be included in the national debt. Photograph: Getty Images

 

The agonising in Cabinet about how to charge people for water and how much to charge them can be seen as the first big test of the Government’s economic mettle following the bailout. Many have been quick to congratulate the Government on the tough decisions it took over the past three years, but the praise was always tempered by the knowledge that the troika was looking over their shoulders. The unanswered question was always : “Would we have done this if left to our own devices?”

It seems we now have an answer and it looks like it is: “No we wouldn’t have.”

If the various unnamed economic sages who rounded on the Government last week are correct, when it came to the crunch, political expediency trumped sound economic management on water charges.

The nub of their criticism is the assertion that the “low” likely charge of €240 per household per year may save the coalition’s skin in the coming local and European elections, but will add billions to the national debt and hamper recovery.


Non-exchequer sources
It’s a complex argument with many moving parts but the core point is that a state-backed company such as Irish Water or the ESB has to generate at least 50 per cent of its income from non-exchequer sources. If it doesn’t, then it is considered simply to be part of the Government. As a result all its debts – which will run to several billion euros in the case of Irish Water – are treated as Government debt. This has all sorts of negative knock-on effects for everything from the national credit rating to the all important debt-to- GDP targets set out by Europe.

On the basis that the estimated annual costs of running Irish Water will be €560 per household, it now looks very likely that Irish Water’s debts will be included in the national debt.

It’s clearly not ideal for this to happen but is it a disaster? Probably not.

At one level all we are talking about here its simply national bookkeeping. Irish Water’s debts are going to have to be paid one way or the other and the exchequer will be footing a big chunk of the the bill however you look at it. It will either pay directly – via a subvention to Irish Water – if the charges are low or indirectly via social welfare if they are set very high.

That said, the national books are important. For the foreseeable future Irish economic policy must be framed within strict limits agreed with Europe. Adding a few extra billion to the national debt will make the job of balancing the books to Europe satisfaction all the harder.

We are also a very heavily borrowed country and the buyers of our debt scrutinise the national books very closely to make sure that there is enough cash available to make sure they get their money back.

For these and other reasons the fiscal fudge indulged in by the Government over water charges will have economic consequences. But how serious is impossible to predict.

Maybe a low water charge will encourage consumer spending and foster growth thus cancelling out the negative effects predicted by some. Or maybe something else entirely unrelated will happen somewhere else in the economy and growth will exceed expectations making the point moot.


Ratcheting up charges
Another possibility is that once the next general election is over the new Government will start to ratchet water charges up to over 50 per cent of Irish Water’s income and thus solve the problem that way. (Although in truth it is hard to have any real confidence that, if they don’t get a break, the Government will take the tough decision and put up water charges. What happens, for example, if the next Government promises not to raise water charges in order to get elected or ends up in coalition with anti-water charge independents?)

But no doubt the Cabinet rationalised their decision on one of the above or some other optimistic scenario. And this is what was really wrong about last week’s decision and more than a little disconcerting.

It was the ease with which they chose the path of least resistance; they let themselves off the hook when confronted with their first really tough economic decision since the bailout.

Given the huge price that we are still paying as a result of their predecessors’ predilection for managing the economy in the same sort of “give it a lash” fashion, it is impossible not to despair of Irish politicians.

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