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Irish Debt challenges and US State Budget crises are same sides of the same coin

by Aaron McCormack on February 22, 2011

The scene in Wisconsin will play out in Ireland soon enough

“Even if we eliminate the banking problems from the equation, Ireland still has very tough choices to make about taxation and about how we spend money on services to people – that exact scene is playing out in US States right now.”

First of all it is important to say at this time that we are very lucky and privileged in the US and Ireland to have First-World problems.  The people of Tunisia or Egypt, Libya or Bahrain can teach all of us something about having to really agitate and work (and die) for political change and a new set of governing values.  And other, even more impoverished, countries have a long way to go to enjoy the luxury of public services of whatever standards.

That said, this week is crucial in the future of both countries that I call home – Ireland and the USA.  Both countries have been living well beyond their means for some years. In both countries the sovereign government is borrowing heavily to bridge the gap between revenues and expenditures. In both cases, a lot of the borrowing is going to fund activities that many would question – whether it be support to the banking system in each country or the funding of overseas wars in the USA.

For both the US Federal government and the government of the Irish state, the situation in the Statehouses of the USA represents a foreshadowing of what is to come.  The spectacle in Madison, Wisconsin is set to be repeated in Dublin and in Washington D.C.  The reason we see this happening first in US States is because of their legal obligation to run balanced budgets.  Whilst US States have been able to concoct some forms of debt within their balanced budget restrictions, those mechanisms have reached their limits.  Now, propelled by the Tea Party tide in November’s elections and the sheer fact that most US states are broke, the issue of balanced budgets is centre stage.

US States haven’t declared any wars recently and are not in the business of bailing out banking systems either.  Each have very different ways of raising revenue and provide a differing range of services to citizens. Their methods of collecting revenue are similar to national governments (income and corporation taxes, sales taxes, fees for services) and they also recieve monies from the US federal government.

Here in Massachussets, it was Governor Mitt Romney who signed into law in 2006 a bill that created a legal obligation for everyone in the State to have some form of health coverage, with the State government heavily active in the market.  (Remember that as Romney gears up to run for President again in 2012….).  In Vermont, legistlation is being debated to create a state-wide single payer system similar to the Canadian or UK systems.  In New Hampshire (State motto – Live Free or Die) no-one pays State income tax but the government provides fewer services.

The US States therefore give us, in one country, a microcosm of the range of options available to any society looking to balance tax regimes and services to citizens and if you know the “personalities” of these States you can see the values of the people reflected in the direction they are heading.

If we strip away the banking crisis in Ireland and imagine for one wonderful moment that there is no NAMA, no EU/IMF deal, no further write-downs on the cards for the Irish people to pay for. If we imagine all that, is Ireland balancing its books?

The answer is clearly no. To put it simply, even if we eliminate the banking issue completely Ireland is still set to spend more than it makes.  Remember, we entered the the current crisis with debts of over $40bn, and have built further debt since (even aside from the banking debts), and will continue to build debt under current plans from all parties.  The bleeding is slowed, but not yet stopped. The burden of ever higher interest payments on loans to Ireland will continue to drain our finances.

Ireland will have to tax more, and spend less, to return to a balanced budget at some time.  With no wars, and, in our fantasy world, no banking debt, Ireland looks very much like a US State. And that brings us back to the arguments that are currently playing out it in Wisconsin.

There are not many places to go in any budget in order to grow revenues or cut costs.  To help make the difficult choices, a business, city, state or country need to be very clear on their values to help guide those choices.  In America this usually divides neatly into Left/Democrat “tax the rich, protect services” and Right/Republican “cut services to freeloaders, lower taxes to stimulate real growth”.  And both sides will usually talk about “eliminating waste”, a task that few politicians and civil servants are capable of addressing.

You can hear echoes of this in the Irish campaign – but only echoes. Most if not all parties are still not telling citizens the unpalatable truth and are promising better services even as the amount of money we will have to spend on them is clearly falling.  Despite eliminating the banking issues from our equations, we will have to raise taxes and cut budgets for services to have a remote chance of acheiving a stable economic future for the country.

Hard choices need to be made.  Do we raise taxes on corporations and risk them taking their business elsewhere, as Dell did? Do we do the same to the richest in Ireland by  closing the tax/expat loopholes? Do we stop having an army? (at least we don’t have to worry about a coup!) Do we put the unemployed to work in value added ways? Do we cut international aid completely? What state assets do we sell or privatise? Which pet infrastructure projects will get the chop? Do we keep the local hospital, everywhere? Do we raise the retirement age? Do we stop publishing everything in two languages?

We cannot say no to all of these. Hard choices need to be made. What Irish “values” will define how Ireland will make these choices?

From → General, Ireland, Politics, USA

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