The Irish state cannot afford to be a short-lived insurance company indefinitely
When there are wrongs to be righted, democracies can sometimes become populist. Governments are tempted to act like fleeting insurance companies, compensating those affected by every disaster that strikes, including historical injustices, regardless of legal liability and without court judgment.
here are two cases in progress where the state has expressed its willingness to compensate people who have suffered undeniable misfortune, but the costs run into the billions and remain to be calculated. Public sympathy is great, but the sums at stake are not minor and blank checks are signed. Since the Treasury was over-borrowed before the added burden of Covid deficits, care must be taken or the checks could turn shady.
Victims of the mother and baby home scandal, detailed in the recent investigative report, are entitled to compensation for state negligence, which would arguably, along with others, including churches, be held responsible if the matter was brought before the law. The victims must be spared from this additional trauma and Minister Roderic O’Gorman is preparing a plan. I have no idea how much money to make up for the blackmail of young women and their babies decades ago, and Mr. O’Gorman is hardly to be envied.
North West homeowners who demonstrated in Dublin on Tuesday did not buy the defective bricks from the government, so the outcome of a damages action against the state is unclear. But there is no one else to sue, and it is impossible not to sympathize with the hapless owners of mica infested homes that are crumbling around them.
They do not need to sue anyone since they have to be compensated by the public purse and the costs could run into the billions. Minister Darragh O’Brien has been tasked with making the sums and opposition members are already insisting that he be generous. They were unanimous in Dáil that there should be “100 pc of repair,” whatever that means, and some of them scoffed at Taoiseach’s reasonable request, “100 pc of what? There must be a real pattern, the cases are different, and the Taoiseach question deserves an answer.
This government will see the state debt increase from around 206 billion euros at the end of 2019 to more than 250 billion euros by the end of next year, mainly due to the deficits linked to the Covid. The figure of 206 billion euros, compared to state revenues then one of the highest in the euro area, included several billion paid in previous years for past misfortunes. These include military deafness, for which the state was guilty, and weather-related flooding, which has never been a breeding ground for litigation. The costs for the victims of mothers and babies, and for the hapless owners of Donegal and elsewhere, will add to the figure of more than 250 billion euros expected at the end of 2022. These additional billions of payments do not were not planned.
It is heartwarming to feel that if something horrible happens, the state will do more than meet its legal obligations. It will exceed them and will make what is in essence ex gratia payments to citizens in distress, for old and current misfortunes and for significant amounts. Unless the borrowing capacity of the state is inexhaustible, a billion here, a billion there, for you to know if it really is.
The victims of corporal punishment in schools, another skeleton in the well-stocked cupboard of unforgettable abuse, also seek redress and some may have a compelling case. What else in the closet? How many boys were slammed for playing football when it was a “foreign” game? Should they go after the Christian Brothers or the Gaelic Athletic Association? Relax, there is a wealthy uncle, the Irish chess board, an insurance company that does not charge premiums and covers past and future misfortunes.
The problem is, insurance companies that are poorly managed will go bankrupt. They are popular for a while, of course, when they charge too little. When governments pay uninsured people, they don’t charge anything at all, which is even more popular.
Reputable insurance companies, in addition to charging sufficient premiums to cover payments, also maintain adequate reserves against future claims. Their balance sheets are inspected by regulators, who will bankrupt them if they appear to be insolvent.
It has happened here with Quinn Insurance and several others. With governments, inspection must be carried out by voters, and short-sighted voters may discover that governments can also become insolvent. In this case, they could waive or reduce the payments. The Irish government became insolvent in November 2010.
In addition to known public debt, there are off-balance sheet liabilities hidden in plain sight thanks to the Comptroller and Auditor General’s reports. These are mainly unfunded civil service pension obligations and the potential deficit of the Social Insurance Fund. Between them, they are comparable in scale to the accepted figure of the public debt. The state also has some financial assets, but they are minor. The net liabilities are worse than you might think and the board, as a free all-risk insurance company, is not credible.
According to a report released last week by the International Monetary Fund, the plans and targets already announced will require capital investment from the Irish state well ahead of the current arrangements, which means even more borrowing.
The IMF echoed estimates of the infrastructure costs needed to meet climate targets already signaled by engineers, as well as delays in water supply and transportation.
ESRI’s recent report argues that a return to balanced budgets may require increases in income tax and VAT, not to mention water charges and, in horror of horrors, more taxes on residential property, which the Irish left is perversely opposed to. State insolvency brings austerity, a curious bet for the left. No one is more exposed to state insolvency than those who depend on the state.
Interest rates are rising in the US, as is inflation in Europe, and the ECB could eventually follow the US Federal Reserve and raise rates. The holiday from the realities of the bond market will not last forever.