Who is the heir to Ireland's debt?

Every private sector worker is now responsible for debt of €108,000. Guest blogger, University of Limerick economist Stephen Kinsella, asks can they pay it off?
Who will end up paying for Ireland's public sector debt? Photograph: Richard Conway for the Guardian Richard Conway/Guardian

My father used to introduce me to people as "the heir to the family debt". It's a pretty good description for Ireland today. Ireland has a very large level of debt, as well as a large growth rate of debt, this year and next. Of course that is not a good thing. What are the prospects for us paying down that debt?

Europe has a set of rules supposed to stop member states' spending from getting out of hand. These rules say that no government can borrow more than 3% of its economic output in any given year.

This year, when you add in the cost of bailing out our banks, Ireland will borrow 32% of its output. So we're breaking the rules in a big way. That's OK, up to a point, because almost everyone else in Europe is also breaking those rules in these difficult times.

Another rule Ireland is breaking is a rule about debt sustainability. Roughly, over the medium term, if your country's real rate of economic growth is greater than its real rate of debt servicing, then it will be able to pay down the debt. If it can't, then you must at some point restructure your debt.

Who are the heirs to this mess?

So I asked myself a question: who will pay down this debt? Who are the heirs to this mess? The private sector will pay down this debt, if it can, via increased productivity at the firm level, leading to higher profits, and more taxes, which will be used to pay off the debt. And what is happening in the private sector?

It is experiencing large slumps in consumer confidence, restrained demand, and large levels of (presumably forced) saving (more about this in a later post). Also, the economy is shedding workers. And what is happening to the level of debt, year on year? It is rising.

Private sector worker given €108,000 debt

The debt held by every private sector worker
€108,000 euros owed by every private worker stephen kinsella graph/guardian.co.uk

I decided to eyeball the relationship between the numbers of people employed in the private sector in the Irish economy, and the general government deficit — the standard debt level measurement. I should say that Ireland has other debts in the system, so the green line below could have been a fair bit steeper. But all caveats aside, here's what we see for the last six years:

The green line shows the massive increase in debt that each private sector worker is now responsible for.

For example, the green line shows that in 2010 there will be roughly €108,000 (£90,000) owed by each private sector worker employed in that year.

The red line is the number of private sector workers - clearly there are fewer people working in productive parts of the economy to service this debt. So it makes the job of servicing the debt harder again - fewer workers and businesses working harder to pay more taxes to pay off debt levels increasing at an increasing rate.

Not a pretty picture, but a good tonic to the "we have turned a corner" stuff we've been hearing of late.

Now nothing in this suggests that Ireland won't be able to sustain its debt levels. The other part of the rough and ready debt sustainability calculation is rates of growth (or lack thereof). In a previous post I took issue with the Irish government's growth projections.

The EU's projections for Irish economic output growth are more pessimistic, as are the IMF's. The most pessimistic projections I've seen are by Ernst and Young. If readers know of others, I'm happy to update the post later with attribution.

The key issue is the slope of the blue line in the figure above relative to the slope of the level of domestic output. I plot that relationship in the figure below. I plot the ratio of government debt to private sector worker, same as last time, and Ireland's GNP per private sector worker.

Economic growth v debt growth

This orange line is one way to see whether the economy can grow its way out of its problems, as it represents domestic output per private sector worker - or put more roughly, the Irish part of the Irish economy. Readers should remember that Ireland's massive multinational sector distorts our gross domestic product statistics.

In the figure below, I've assumed that gross national product per private sector worker will stay roughly around the same level as last year (i.e. near zero growth), as per a range of forecasts.

We see the level of debt rising relative to the number of people available to pay it down at an alarming rate, and we see the growth of the domestic economy going nowhere.

Economic growth stays flat while debt grows
Economic growth stays flat while debt grows Kinsella table/guardian.co.uk

We can see that the key is 2011: if things worsen significantly, the Irish economy is toast. If things recover, we may yet scrape through.

Let me stress right away that those two lines diverging does not prove anything. The Irish economy may still get onto a sustainable path for its debt.

These charts simply provide a cautionary tale to excessive "we can get out of this" rhetoric. Of course there are good things going on in the Irish economy, but I'll leave it to the very smart Ronan Lyons to explain those to you.