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David McWilliams: It’s not money we lack, it’s vision

Now is not the time for agonising about budgets; it is time to do the things that we should have done years ago

Over the past few weeks, you may have noticed submissions from various sources warning about Government spending, calling for a reduction of Ireland's debt/GDP ratio. Expect more of this as we approach budget day. The underlying fear is that if the State's overall debt position rises too high, the financial markets will withdraw their consent and we will face a national debt crisis. This type of thinking is common, particularly from the older generations who have seen Ireland suffer from at least two debt crises, one in the 1980s, the other following the 2008 housing crisis. But the world has changed, and it is unlikely to go back.

In fact, the policy reaction to the pandemic – proto-helicopter money with pay checks going to people who are at home watching Netflix in the afternoon, massive expansion of welfare spending across every metric and a huge increase in the Government deficit – could come from a policy folder entitled "Lessons learned from the stupid reaction to the 2008 crisis".

Does Europe want to repeat the 2009-2014 experience of austerity, inter-European scraps between the south and the north – which almost saw the Euro break up – radical and neo-nationalist politics, rising inequality, and long-term unemployment? Obviously not.

We do not have to entertain this economic nihilism again. The lesson has been learned.


Leading this mindset shift has been the European Central Bank (ECB). During the pandemic, the ECB's message to eurozone governments was in the vein of "Spend what you think you need, keep the invoices, and don't worry, we will cover it." By underwriting the lockdown, the central bank maintained living standards and political calm; it also proved to monetary ideologues that it can be done. There need never be a shortfall of money again. There may be a shortfall of resources, people, energy and entrepreneurial nous that could cause sporadic inflation, but there will not be a shortfall of money, not when the ECB is printing it.

Monetary theory

In the eurozone, we are experiencing modern monetary theory (MMT) through the back door, although no one will admit it. It’s too close to heresy. The ECB has in effect monetised the eurozone’s pandemic response. Governments turn up in Frankfurt at the ECB’s discount window, much as people in the old days turned up at a pawnshop, they hand over an “IOU” called a government bond, and the central bank gives them crisp new euros in return. In financial terms, the central bank is turning water into wine. That’s what it does.

The government then goes out and spends that money in the real economy on schools, salaries, PUP payments or Mica compensation claims (although you do have to ask, what is the point of buildings’ insurance on these homes; and will the next person who gets a dodgy gutter installed have the right to government redress?).

What the State spends the money on is the realm of politics, but it is critical to appreciate that the Government’s deficit is someone else’s surplus. If you get money from the State, say your salary, it is obvious that your account has been put into surplus and a corresponding deficit comes up in the Government’s account. We might be forgiven for interpreting the Government deficit as a bad thing. The world “deficit” sounds worrying. A deficit is a falling short, stemming from the Latin deficit meaning “a wanting”. But we forget that, in economics, the money goes somewhere, and a government deficit is some citizen’s surplus. Who that citizen is, how poor or rich they already are, is a decision for politicians, but the economics is pretty straightforward. The government has a deficit, which materialises after tax as a number called the debt/GDP ratio, but real money is dropped into real people’s accounts, which is then spent, which drives GDP upwards, driving the debt/GDP ratio downwards. Over time, the government debt is never paid off, merely rolled over. That’s another little secret “deficit hawks” rarely admit.

Ideological question

Of course, the ideological question remains about whether the money is spent appropriately. Typically, but not always, the debate on government spending comes with an implicit bias that this spending is usually bad, privy to favouritism and morally unearned. Do you think the Government's spending in the pandemic was wrong? Would it have been better for society had we stuck with the ridiculous Maastricht targets (enshrined in a law that we flagrantly broke) on debt and spending, resulting in mass impoverishment of people who were debarred from work or people who were ordered to close their businesses?

It is conceivable that there are people who would have opted for sticking with the Maastricht debt targets and risking widespread poverty, but I’m quite sure they’re in a small minority.

As the pandemic lifts and things get back to some sort of normal, what do we do now? It is highly unlikely that the ECB or any rational European policy maker is going to demand that countries return to the pre-pandemic fiscal status quo. Take Italy for example. Imagine the deflation, higher tax, and lower spending if the ECB were to demand it reduce its debt/GDP ratio of 130 per cent down to 60 per cent as stipulated in the Maastricht treaty? Is the ECB going to risk another eurozone crisis for the sake of a number when it is happy (and so too is everyone) to keep buying Italian IOUs? Is it really going to risk a currency crisis?

Consider history’s judgment of such a move. “The ECB, the only central bank to actively and unnecessarily destroy its own currency.” It is not going to happen.


Near term, it is much more likely that the coming property-related slump in China will affect European, and particularly German, growth. German exports to China are worth 2-3 per cent of German GDP annually. Subdued Chinese demand will keep any upwards pressure on European interest rates in check. In addition, the new Social Democratic Party government in Germany, particularly if it is in a coalition with the Greens, will be much less hard-line on debts and deficits than its Christian Democratic Union counterparts. For the foreseeable future, mainstream Europe will be chill on debts. Crucially, so too will be the financial markets. Therefore, in the next few years, lack of money will not be a constraint.

Ireland has a few infrastructural problems to fix, housing and an urban transport system being the two crucial ones. Further out, building a world-class renewables industry based around our Atlantic blessing of wind and waves is as imperative to us as building an offshore oil industry was to 1960s Norway. State investment and financing will be part of these big plans. We should do it now. Let's lock in the one-off opportunity of interest rates at 3000-year lows. (We're talking since all the way back to the Sumerians.)

Now is not the time for agonising about budgets; it is time to do the things that we should have done years ago but didn’t have the cash to do. We’ll never get a better chance. It’s not money we lack, it’s vision.